A strong demand for dollars is driving both equity and and bond prices. Lower bond yields sustain borrowing, and so I think we’re seeing something like an internal carry-trade being executed.
I expect the net result absent external shock to be a long term upward trend in equities.
The problem with translating this assessment into timing rests with the fact that 2008 was an epic event. Lehman Brothers. Collapsing credit (liquidity). It was the equivalent of cardiac arrest caused by a supply-side money shortage.
Equity holders got killed in 2008. Yes, in the long run buy and hold was vindicated, but I think that’s always the case.
What’s preventing a similar catastrophe now? Active interventions by central bankers? Well, ok, but the U.S. and Britain are diverging in both need and policy from Japan and the eurozone.
Insofar as equity markets might be taken as a proxy indicator for economic prospects, then one must be optimistic, because the U.S. is a big and prosperous place. Natural resources, rule of law etc.
(Civil unrest is what it is, as they say, and unlikely to affect markets anyway).
Ok, so how about that geopolitical risk? Has it truly abated?
Ebola is in an incubation phase from a news cycle perspective, but it is arriving on non-African shores.
Chilly weather is coming and Russia hasn’t agreed to pipe gas to Europe yet. Western sanctions seem to be biting, but Mr. Putin isn’t sitting still. He and his allies have lots of leverage they haven’t used. Vlad is waiting for winter to eat the dish that’s best served cold.
They’ve also got an ace or two up their collective sleeves. The Chinese have massive dollar reserves and a lock on the rare earths that drive modern technology.
I’ve said before that our best bet for peace is to be a good debtor nation and to pay our bills on time. When the senkaku/diaoyu fracas kicks off, don’t get too exited.
Russia will be happy to put Japan in a pincer with their own claims to some of Japan’s northern islands, and no one but the US and Japan are going to be surprised when we roll over.
Remember that there are only 2 years left on this game clock. The Russians are unlikely to let us boost for the moon while they suffer under sanctions. The only thing holding them back is Chinese reluctance to press the advantage on their biggest debtor.
So, there you have it. Absent clarity, enjoy the profits you should have already locked in.
Maybe use a small percentage of available cash to keep a line in the water of the equities market (and I only ever recommend low cost Vanguard-style index-trackers), just so as not to feel left out.
Gas prices are falling. Gold is falling. If they leave us alone, the average Joe might just see some improvement in the standard of living. A strengthening dollar also means increasing purchasing power for the common man.