(See Part 1) After a 30% move in US equities in 2013, and a powerful move off the March 2009 lows (Nasdaq +221%; S&P 500 +164%) investors are confused by today’s markets, the headlines, as they fear another major correction.
Long term bull markets are born after major corrections, a bottoming phase, and with a lot of uncertainty. The high levels of cash on the sidelines and the uncertainty of bonds in a rising interest rate environment can be the fuel that equities and other risk assets need to continue their march higher.
Unfortunately, behavioral finance and predictive models are prone to mistakes especially as the markets climb a wall of worry. What makes today’s environment different than 1982 (the last birth of a longterm bull market) is the level of interest rates. From 1982-2000, falling rates provided a tail wind for bond and equity investors. Additionally, portfolio managers enjoyed rising bond prices for the part of the portfolio that they counted on to diversification.
Today, with interest rates near zero, bonds no longer have a tail wind. In fact they provide a head wind, causing choppy waters, and increased volatility in bonds. Although bonds can still be a good diversifier to an equity portfolio when equity volatility strikes, investors need to look for “bond alternatives” for income AND for growth.
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Historic bull market only in ‘middle innings’: JPM (CNBC.com) There are many reasons the stock market could advance double-digits again in 2014 and in years to come, JPMorgan Chief U.S. Equity Strategist Tom Lee told CNBC on Wednesday, a day after the Dow Jones Industrial Average and S&P 500 Index each…
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