The Lifecycle of a Financial Boom
As a summary statement, I believe both BULLS and BEARS will be disappointed in coming weeks and months. Markets will rise enough to get the BULLS excited and then proceed to fall enough to stir the BEARS.
My thesis has not changed since the beginning of the year.
Stocks are still trending BULLISHLY, but the old leadership (tech, SPACs, and high risk investments) have rolled over…in some cases, significantly.
These leaders have been replaced by “commodity based” names in the hopes of profiting from the rapid rise in inflation. So far, so good on this front.
The key point to understand is that, as this is going on, longer duration interest rates have jumped higher. At the end of the day, interest rates will dictate what happens to stock and real estate markets. If interest rates keep rising, both stocks and real estate will be in trouble.
My thesis remains that interest rates will rise enough to pause the increases in stocks and real estate in 2021, but not enough to precipitate large declines.
Let’s stick with that idea for now and see how things play out around that view.
Check out the following graphic of the rates of returns, over varying periods of time, for the major North American indexes.
The date this data was collected was March 19th…right near the absolute COVID-19 low in the stock markets, in 2020.
- Look at the 12 month rate of return column. Those are some insane numbers right?
- Next look at the three-year rate of return numbers. Outside the US indexes, the rates of return are fairly subdued.
- Finally, check out the 10 year rates of return. Again, outside of the US, not very exciting.
Let’s look at the S&P/TSX Comp and the S&P500 indexes on the 10 year chart.
Both charts still look pretty good and I can’t see any reason to sell either one. On the other hand, when I look at interest rates rising, I can’t get too motivated to buy either chart.
There has been a lot of really bad research and analysis done lately.
In many ways it seems pundits are just saying whatever they want.
As valuations stretched higher, low interest rates were used to justify the high multiples. Now that interest rates have gone up, the justifications have gotten crazier in narrative. The further you go out on the risk continuum, the weirder the research gets.
Just search “Non-fungible Tokens” or “NFT” analysis, in Google and see what you end up with. Some of that stuff is just plain ridiculous.
This is a time when it is important to know what you own and to take advantage of having an experienced and knowledgeable investment advising team.
Take a look at your portfolio and what it holds. If you have any questions, give me a call.
If you want to have a longer discussion to clarify what you own if you aren’t totally certain, please click here and we can set a time to chat when we won’t be interrupted.
Wishing you and yours a Happy Easter this weekend and a joyful start to Spring. Keep healthy, safe and well, friends.