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Working Efficiently

Whether you like it or not, the markets are acting normal right now.

Yes, that’s the case even with the S&P down over 5% from its September 18th peak. And with the Dow down over 4% from its September 19th peak. The markets are acting normal.

We have been talking about a breather within the equity markets for some time. We got a little bit of one back in January and then we have seen short spurts throughout the year. But the past three weeks have been more volatile and more reminiscent of breathers from past years.

Could the markets fall another 5% from here? Sure.

Will they fall another 5%? I don’t know.

But even if the markets do fall another 5% (or more), I’m comfortable with the markets right now. Not only do our markets and economy continue to be one of the better ones in the global space, they also seem to be functioning normally.

 

The current normal

As the market continued to rise during the last eight months or so, investors’ concerns continued to be around a bond bubble (and still does). The Fed was stopping buying bonds and talk about rate hikes in 2014 was heating up. And people have been freaking out.

Rates on the 10-year Treasury bonds actually saw a mini-spike towards the end of August as the Fed neared the end of their bond buying (which ends in October).

And as we were experiencing this mini-spike in rates, mumblings and concerns started to file in that we were on track to see a real problem in the markets.

Equities had continued to move higher and were bound to correct. And bonds were losing all their support from the Fed and we have to be coming up on the all talked about bond bubble. So, the worry was that we were going to see stocks fall and yields rise at the same time.

That was and likely still is a worry of many. And it still can happen. But what we have experienced over the last three weeks seems to point to a different story.

The markets have fallen and volatility has spiked. Geopolitical risks haven’t subsided and investors’ nerves have been rattled.

And as we have all learned in Finance 101, what is supposed to happen i n those periods of time? Investors get scared and run for safety… in bonds.

And what has happened? Exactly that.

As the markets have fallen, yields have fallen to their lowest level in 12 months. The 10-year yield is below 2.30% and the aggregate bond index is now up 5.14% for the year.

Fear leads to a flight to safety and safety for investors continues to mean investing in bonds. And that’s why it continues to be a necessity to have bonds as a part of a portfolio allocation. Even in a period where headlines are calling for a bond bubble.

 

Some perspective

Many investors have questioned allocations to bonds, but it is times like these The S&P and Dow are down 3.35% and 2. 93%, respectively, month to date. Core fixed income holdings like BND & LQD are up 0.7% and 1.19%, respectively, month to date.

High yield and short term high yield are down 1.45% and 1.20%, respectively, month to date. But this is still greatly outpacing what we are seeing in the equity markets.

An equity market breather is welcomed by many. From my perspective, it provides a fresh buying opportunity for new and existing monies. And this next buying opportunity may just be that catalyst to continue the equity market’s bull run.

But more importantly, this recent market breather has shown that markets are working efficiently. Stocks and bond markets are working how they historically have.

And despite the noise around bonds and the worries of an equity market decline with a rise in bond rates…the efficient market has proven true for now.

This tells us that staying diversified is the best way to weather volatility, while also taking prudent advantage of upside pops.

 


 

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