Things couldn’t have been rosier for equities in 2013.
As I write this, stocks are up 187% from the depths of the crisis-panicked stock market of March 2009, and this year stocks are already up 24%.
It’s been a banner year except for those holding bonds. The 30-year Treasury, by contrast, is down 11% from January 2013.
Is this finally the end of the great bond bull market? The Fed, along with almost all industrial nations, has printed enormous amounts of currency to finance deficits. Our deficit has risen 67% in the past five years to almost $17 trillion. And this doesn’t consider the Fed’s quantitative easing programs, which put us in an even deeper hole.
I won’t bash Bernanke or his easy-money legacy. His money flood helped save our financial system. But the Fed has been easing far too long, and millions of retired investors are paying a frightful price in paltry returns on their savings. Moreover, millions of employees now have their retirement accounts badly underfunded.
Even though the Fed has not cut back on its purchases of Treasury and mortgage bonds, many folks fear that a tapering-down policy will cause the economy to slide back into a downturn. Both the Fed and major central banks appear to be trapped.
So where to now? If rates move up over time, as appears likely, holding mid- or long-term bonds will be calamitous. As the economy improves in the next few years, yields will begin to rise at a faster rate, destroying bond values. This could bring on a nasty bear market. In a worst-case scenario I see inflation climbing to 10%, as it did from 1978 to 1982. Back then long bonds yielded as much as 15%, while short Treasurys reached almost 20%.
Why are big institutional investors and bond experts ignoring this enormous danger? It’s textbook investor psychology. Investors tend to fixate on the present and recent past, and time and time again extrapolate these trends well into the future.
Don’t despair: After the initial shock of rising inflation and interest rates, the market will resume its climb. That’s precisely what happened from 1978 to 1982 when stocks climbed 14% annually, beating the rate of inflation by four percentage points. If I’m right on inflation and rates, we’re on the cusp of a major bull market move.
Like Warren Buffett, I’m not a gold bug and prefer real estate and equities as inflation plays. Here are some good stocks for the next market wave:
) is one of the world’s largest independent oil-and-gas exploration companies. It’s in a transition period, selling assets with so-so returns and putting the proceeds into other projects. Earnings are expected to be up almost 10% this year and again in 2014. The stock trades at a P/E of 14 and has a dividend of 3.8%.
Freeport-McMoRan Copper & Gold
) has been badly hit, dropping over 10% from its 2012 high. It trades at a discount of 10% to its global mining peers because of its large stakes in copper and gold. Now that it’s made several acquisitions in oil and gas, earnings are expected to rebound by 21% for 2014. FCX has a P/E of 13 and yields 3.4%.
The worst is behind global banking giant JPMorgan Chase
). I think it will show a 13% increase in earnings in 2014, despite slow loan growth and some near-term pressure on margins. Its P/E is 12, it yields 2.9% and it’s trading at a 60% discount to the book value of the S&P 500.
Office supply giant Staples
) has gone through a rough patch trying to downsize U.S. stores while at the same time taking its model to Europe. I expect earnings to rebound strongly. Staples has a forward multiple of 11 and yields 3%.
Larry Ellison’s software company Oracle
) has had an impressive growth rate for several decades. It could get even better with its aggressive new stock buyback program. Oracle provides good value at an estimated 2014 P/E of 11 and a yield of 1.4%.