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Which is certainly not the thing market tops and bubbles are made of. Everyone is negative on the outlook. That speaks volumes about where we stand.
Tops and bubbles are created when everyone only sees the good in the outlook
I remember 2007-2008 quite well. Sentiment was awful. Then 2009, the stock market reflected that. Great buying opportunity.
It was the run up that was fueled by irrational optimism. This run up was fueled by Fed policy IMO.
I would disagree on the irrational optimism and partially disagree on the effect of the Fed policy. The policies did help businesses and the stock market but many companies also did very well at adapting to tough economic conditions. Lots of people lost jobs and equity but businesses continued to make profits and accrue cash. Low interest rates and bond returns pushed investments towards stocks but those investments were hardly irrational when companies coped and made good profits.
I would disagree on the irrational optimism and partially disagree on the effect of the Fed policy. The policies did help businesses and the stock market but many companies also did very well at adapting to tough economic conditions. Lots of people lost jobs and equity but businesses continued to make profits and accrue cash. Low interest rates and bond returns pushed investments towards stocks but those investments were hardly irrational when companies coped and made good profits.
What fueled the market to the heights seen prior to the 2008-2009 crash?
How did the Fed's policy help the average business owner? Low interests rates make it more difficult for small business owner to secure funding.
Money gravitates to where there will be the best ROI relative to risk. That has been the stock market, as a direct result of Fed policy. This has come at the expense of capital investment, which helps to make businesses competitive. Eventually, something has to give. Corporations can't operate as an empty shell forever. Complacency is death in capitalism.
Corporations can make record profits when they can eliminate large chunks of their workforce, engage in aggressive stock buy backs programs in obvious bull markets, eliminate training and internal development, delay investment in physical assets, etc. This is not a sustainable long term strategy, for obvious reasons. Eventually, you have a return to "business as usual". Maybe that's why we are seeing, as unemployment drops, so too does labor productivity. This will have a direct impact on business as a whole, not just corporations.
As the economy starts looking better for the average American and wages rise, the stock market will probably seem more boring, and less rewarding.
bond yields have already been rising for months killing the bond market. most bond funds are at a loss including the interest at this point.
Will most likely generate capital inflows to equities. After interest rates have increased, it may be smart to increase allocation to bonds, maybe some commodities. Hopefully the yield curve will invert at some point in the next few years.
the money that fled to bonds is chicken money . they were either afraid of stocks or shifted because of stock valuations being to high. i don't see that money shifting back.
the problem this time is we never had high stock valuations and low rates together so the typical when bonds stumble we go to stocks may not happen. cash instruments may be the choice for those who leave bonds this time.
Unless a 1937 happens again, I think there's a good chance capital will flow from bonds to equities. Bond market is the largest capital market of all. The bond market was 20 trillion in 1990 and increased to almost 40 trillion by 2010. All time interest rate lows means interest rates will likely increase. Some of that money will flow into money market. A significant portion will flow into equities as everyone and their mother knows the market returns an average of 7%.
The exception is if macroeconomic data falls short of expectation spinning the economy into a tailspin as the fed can't lower interest rates much to stimulate growth. Only then would significant cash move towards treasuries/money market/gold.
the difference now is risk. usually when money flowed away from bonds at these levels it was because stock valuations are always lower at these levels . not so today and both bond markets and stock markets are considered very risky at this point. never before have low rates and high valuations happened together .
no one can guess what is next but i think many are gun shy about equities at this point if they are hiding out in bonds and won't do the typical buying in., i think cash instruments will see a lot of the bond money if bonds continue getting pounded as they are. folks are getting more concerned with return of their money than return on their money .
being on the 401k committee at work i have never seen a bigger switch by emloyees to cash instruments as i have the last month. not a smart move for the long term.
a lot of baby boomers are getting ready to retire as well and are raising cash to do so. i have all my own 401k money being put in the stable value fund this year as that will be the cash we live on when i retire . i am retiring next month so that cash is going towards next years budget .
but with sooooo many baby boomers retiring quite a bit of market money may be channeled out for spending the immediate years.
i am sure hoping markets do well but i am planning around below average performance from both equities and bonds. if i am wrong it will be a nice upside surprise instead of having to slash budgets.
Last edited by mathjak107; 06-12-2015 at 04:11 AM..
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