9/29/2010 7:30 PM ET|
Get ready for an epic bull market
Overcautious investors could miss out on what's shaping up as the greatest stock-buying chance of a generation.
Investors are scared. Workers are worried. And pessimism reigns. Yet in one market, a boom is under way.
I'm referring, of course, to the bond boom: For the year, iShares Barclays 7-10 Year Treasury Bond Fund (IEF) is up about 14% and the iShares iBoxx $ Investment Grade Corporate Bond Fund (LQD) up about 12%. Compare that with a measly gain of about 2.4% for the Standard & Poor's 500 Index ($INX) over the same period.
It's no wonder that investors have yanked $58 billion out of U.S. stock funds this year while pouring $172 billion into bond funds, according to EPFR Global data.
But this very phenomenon suggests we're on the cusp of a huge bull market for stocks. Here's why:
Money in the making
All of this bond buying is pushing yields lower and lower, making credit cheaper and cheaper for borrowers. Already, more high-yield debt has been sold this year than was issued in the whole of 2009. Even Dubai, the Persian Gulf emirate that rocked global financial markets last November and brought the problem of over-indebted nations to the world's attention, plans to sell $1 billion in new bonds.
Microsoft (MSFT, news), which publishes MSN Money, sold $1 billion worth of three-year bonds last week at a record-low interest rate of just 0.875% -- just a quarter-point more than the yield on comparable U.S. Treasurys. Never before has a business borrowed so cheaply, according to Thomson Reuters data going back to 1970. This follows recent low-cost-debt issues by the likes of IBM (IBM, news), Hewlett-Packard (HPQ, news) and Procter & Gamble (PG, news).
This bond bull has been in place for a while: Since August 2000, the S & P 500 Index is down nearly 17% on a total-return basis, including both dividends and capital gains. Compare this with the total return of 127% on investment-grade corporate bonds over the same period.
The good news is that periods of stocks underperforming bonds are historically very rare and don't tend to last long. After all, stocks offer something bonds can't: the opportunity to profit from earnings growth. Plus stock returns offer a measure of inflation protection, which bonds lack.
With investors devouring new credit issues and lowering corporate borrowing costs, companies have lots of free money to spend. And that sets the stage for an epic bull market in stocks -- on a scale that hasn't been seen in generations -- as CEOs use cheap credit to enrich themselves and their shareholders.
How epic? Well, a couple of analysts offered realistic numbers this week that would push the S & P 500 past 2,000, with gains of as much as 85%, based on 2011 earnings. (And then there was the analyst who made headlines this week predicting Dow 38,000, bringing back memories of the famous Dow 36,000 prediction a decade ago. I'll call this less realistic.)
Over the long term, we can expect big gains. We're at a rare low point for interest rates and near a Depression-era low in the 10-year return of the S & P 500. Both suggest a multiyear advance lies ahead.
Bond bull on the attack
Interest rates are tricky. Fundamentally, they reflect the relationship between the supply and demand for money. But they are also so much more. They reflect inflation expectations. They reflect the level of risk. And they reflect the underlying growth rate of the economy.
So for many, the current bout of ultralow interest rates looks and feels a lot like the situation Japan has faced since the late 1980s. In other words, near-zero interest rates represent a deflationary/low-growth future. In that environment, stock returns should suffer.
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Plus, how is the bond market going to stay at low rates? Every country on earth is raising rates. And once QE2 is gone, and the budget turmoil really starts for the US, you're going to see tax increases in most of the developed world, and rising interest rates.
There's going to be some serious volatility before settling. The BRIC is going to require a Volker style inflation fight. Which means some serious turbulence in countries that have fallen in love with irresponsible loaning.
I'd say the Bull you are talking about is a ways off. Possibly 2015. We're actually in a bear super cycle. March 2000 - Today. The cycles usually last 15-20 years. 1950-1967, 67-83, 83-2000, etc. And that makes sense given the absolute destruction of 2008 and the impacts that can't just be washed aside from it. Businesses are still majorly holding back on actual expansion, so until another force rises that pushes earnings growth, they won't spend no matter how much cash they are clearing.
That force I would expect to be the rise of other global consumers that finally push Indian, Chinese, etc wages up. But there's no evidence that's happening now. Emerging market inflation rates are destroying all the wage growth of the average consumers. The people who actually buy real stuff. That would be the indicator to me, once those countries finally tame inflation much like the US did after the 70s. Until then, it's a no go.
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