Last Wednesday’s Federal Reserve announcement to continue the QE Taper felt like one of the most under-covered and muted post meeting reactions that I can remember in a very long time. With the SPX closing up nearly 1% on the week, and within 1% of the all time highs made last month and the VIX closing at 2 month lows, the price action on fairly low volume seems complacent. For some odd reason it appears that U.S. Treasuries may be a better tell for investor angst, as the TLT (iShares 20 year bond etf) closed Friday at levels not seen since the “Taper Tantrum” of last June when then Fed Chairman Bernanke floated the trial balloon of decreased bond purchases:
I guess the takeaway is that if you are just looking at the SPX and the VIX, things appear pretty good, but how on earth can bonds be rallying in the face of the Fed’s stated policy of reducing bond purchases by $10 billion a month? (See Enis’ case for lower yields from 2 weeks ago.) Could the Taper really be priced in at this point, despite fairly anemic growth??
Obviously, geopolitical concerns have been brewing in the background even though U.S. investors couldn’t seem to care less. But despite our recent checkered past with debt ceiling stand-offs, U.S. Treasuries remain one of the only true “safe haven” assets on the planet. So can bonds and stocks go up at the same time? Well of course, they did for years prior to last May/June top. But is the price action now signaling a potential shift for the near term for equities? I suspect it is. Despite the headlines from Friday’s non farm payrolls print, a look under the hood revealed a slightly different story as to the health of the jobs markets.
I guess from where I am sitting the Fed is going to keep the Taper in place because the powers that be have concluded that it is providing little benefit to their mandates aside from causing certain risk assets to go parabolic like the move in high valuation, the record prices being paid for high end real estate and some massive art auctions. Maybe in the 5th year of a Fed recovery the new chairwoman feels it best to clear the decks of the old crisis policies and ready some new ones in case we get a couple more prints like the Q1 GDP report from last week over the next couple of qtrs.
Data in China continues to disappoint, the Russian economy could be on the brink of collapse, and tensions in Ukraine could cause strain to Europe’s already anemic growth. Scrutiny over Brazil’s preparation for this year’s World Cup and the 2016 Olympics seems likely to cause unrest and I could go on and on. The case for owning U.S. equities at all time highs here seems like a fairly bad risk reward trade when you consider the underlying weakness in pockets of tech stocks, biotechs and small caps. Maybe you get a breakout in the SPX that would feel more technical than anything as it feels the index has a date with 1900, but it I don’t see the risk/reward as balanced. I see possibly a 5% bounce but a potential 10% drop and at best a 50/50 probability, and likely skewed to the downside.
So if you are looking at the same old same old and feel pretty good, maybe the comeback in your bond funds in Q1 should cause you to rethink the holdings that you have not had to think too hard about in the last few years… stocks!