The first quarter of 2016 appeared to be a non-event in the stock market. The S&P 500 gained a little over 1%. Foreign stocks declined just a smidge. No big deal, right?
Unless you were backpacking in the Himalayas with no internet access, you know that the first quarter was anything but a non-event.
January was scary, the first two weeks being the “worst first two weeks” in the stock market’s history. (Writer’s note: I didn’t really check the accuracy of that statement. I heard it on CNBC, and since everything you hear on CNBC is absolutely true, I’m going with it. Regardless of the statement’s accuracy, the first two weeks were really, really bad and led investors to believe 2016 was going to be a nasty year.) During that time the S&P 500 lost over 9% and international stocks lost almost 8%. (And some investors lost their lunch.) Both indexes gained a little in the second half of the month to lessen the pain.
February came along and acted as if January never happened. As a matter of fact, February was as if NOTHING happened. Markets, both foreign and domestic, were virtually unchanged for the month. Okay, international stocks were down a little over 1%, but after January that SEEMED like virtually unchanged.
Volatility disappeared from the stock market in February. Metallica left the stage and Enya replaced them. It was a stock market on Quaaludes.
And then March came along and made everything all better. The S&P 500 increased almost 7% and international stocks went on a tear, gaining over 8%, giving them that “just a smidge” gain for the quarter.
Sometimes backpacking in the mountains is just the right thing to do.
We’ve stated several times in this column that higher interest rates are not in the cards for a long, long time.
To that end, there was an article published in the Wall Street Journal on April 15, 2016, noting that governments worldwide have issued more than $8 trillion of debt that trade at negative interest rates today. You buy them and you are guaranteed to lose money. Nice deal, huh? Central banks are doing whatever they can to try to make variable annuities look like a good investment.
The Bank of Japan, as well as several European central banks, no longer PAY interest on deposits. They now CHARGE interest on deposits. That’s right. You deposit your money in a bank for savings and when you withdraw your money, the bank has taken some of it from you.
“Well, why not just bury it in the backyard if they are going to do that?” you might ask. Simple sounding solutions are seldom that simple. The depositors we are talking about in these large banks are rather large depositors, and for them to bury several million of whatever currency would be a rather monumental task. So monumental in fact that these depositors are actually better off PAYING banks a small amount of interest.
Negative interest rates are one of the most obvious signs that low interest rates are here to stay… and stay… and stay. Banks “CHARGING” interest instead of paying interest is one of the most unusual acts of financial desperation we have seen in our lifetime.
The banks are saying, “We don’t want you to SAVE money. We want you to SPEND money. If you attempt to save money, we will punish you.” The global economy is so slow that foreign central banks are pulling out all the stops to get consumers to spend.
But all they are doing is pushing on a string. No matter what they do, global economic growth will be slow at best. Why? Because there is too much debt.
Simply put, if you borrow money to spend it today, that is money you will not be able to spend tomorrow. And if you borrow A LOT of money to spend today, then you have forfeited the right to spend that money during A LOT of tomorrows. The largest economies in the world are carrying levels of debt that prevents them from spending very much tomorrow… and the next day… and the next day… and so on for many, many years.
And so we end up with slow growth and negative interest rates. There are unintended consequences to a negative interest rates policy. One is that investors are now incentivized to take risks that they might not otherwise take.
Retired investors all over the world now feel the need to “stretch” for higher yield. Stretching means buying bonds with poorer credit risk or owning bonds with long maturities, which can be dangerous.
Pension funds, many of which are already underfunded and have ambitious assumptions for future rates of return will also be tempted to own less creditworthy bonds. Such reckless investing could ultimately make the pensions even more unfunded than they already are. But owning bonds paying zero to negative interest rates ensures their demise, so they are willing to purchase less quality bonds in order to meet their pension liabilities.
In addition, many investors who should not be taking risks will likely be attracted to stocks that pay dividends, artificially driving the price of stocks higher and leading to yet another stock market bubble.
Someday this could all end very ugly. It will be important to have professional investment management.
At Boyer & Corporon Wealth Management, we see no imminent danger of inflation or higher interest rates. To that end, we are comfortable extending our duration on fixed income securities. It’s not going to be easy to get generous, impressive returns in bonds this year.
With the stock market nearing an all-time high, we don’t view it as cheap either. The S&P 500 is nearing 2,100 and we would be more inclined to invest our excess cash in a market that was 5% cheaper. We have a larger allocation to cash than we typically do, and barring a market correction, will deploy cash when we see individual stock corrections.
This information is provided for general information purposes only and should not be construed as investment, tax, or legal advice. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.