Anxiety at Market Highs

As U.S. stock indexes log new highs, anxiety-driven questions arise: How long can the rally last? Is it dangerous to add money now? Should I take money off of the table?

Such unknowns relate to one concept: market timing. The legendary investor Warren Buffett once intoned, “The market timer's Hall of Fame is an empty room.” A successful timer has to make two good decisions: knowing when to get out and when to get back in. Some of the run up of late has been attributed to investors “coming back” after staying away post the 2008 market rout, having missed much of the recovery.

Adding to nervousness is so much negative news: euro-deficits, runaway government spending, comparisons of the U.S. to Greece, Washington scandals, and a slow growth economy. How long can the Wall Street party last?

 As an advisor, the answer must be, “I do not know.” No one does. Those who say they know generally are peddling something...gold, silver, newsletters and books wrapped in a chimera of salvation.

 Here’s what is known. The press loves bad news because it sells. Negative news always outweighs good news, fueling provocative “breaking news” sound bites. You must dig for good news. Do you maintain a steady diet of news? It will make you nervous.

 Economic metrics are solid. At mid-May the financial press reported better than expected gains in consumer sentiment, and the Conference Board’s Leading Economic Index for April exceeded expectations. If gold is a cipher for anxiety, signs of an improving economy are giving gold bugs a whiff of Raid. At $1,388 an ounce on May 21, 2013, gold was down 23% from its October 2012 high of $1,794 an ounce. Silver has performed even worse.

Part of the fall in metals and the strength in the stock market is attributed to a rising U.S dollar. The greenback is up 5% year-to-date against a basket of major currencies, a significant move in currency markets. Gold is denominated in dollars, making gold more expensive to foreign buyers. A rising dollar is headwind for all commodities, restraining inflation.

Flight capital continues to flow into U.S. stocks and Treasury paper. As currencies such as the Japanese yen weaken, investors seek gains in dollar-denominated assets. Parts of Europe remain weak and Germany is slowing. The Middle East is always unpredictable. Hedging in a strengthening currency is a factor in low U.S. interest rates and our advancing stock market.

Ten year Treasury note rates have been flirting with two percent, and we know rates will rise, perhaps to 2.25% to 2.50% by year end. Flight capital plus money printing by the Federal Reserve Bank is keeping rates relatively low. U.S. inflation rates remain tame with core inflation gaining 1.7% year-over-year through April, below the Fed’s 2% inflation target. Market gurus figure that our central bank will continue an easy money policy for the foreseeable future, although that scenario is getting cloudy. Bloomberg reports that declines in gasoline prices have some “pass-through effect” into other goods and services.

 The Fed is printing $85 billion a month, buying government bonds and mortgage-backed securities to stimulate the economy. The European Central Bank and the Bank of Japan have joined the printing party.

 Won’t this cascade of computer-generated money cause inflation? Eventually it could, but not for some time. Inflation is defined as “too much money chasing too few goods.” Right now what we lack is demand, not supply. The world has excess production capacity and no shortage of labor.

 U.S. stocks are not overvalued. Nervousness is a bullish sign. “Irrational exuberance” is nowhere to be seen. Yes, a pullback always is possible. But the timing and extent of such an event is unknown. Keep ample cash and short term reserves and maintain your long-term strategic investment policy.

 Remember—we aren’t Greece. Greece doesn’t have a printing press. We do...for better or for worse!

 Lewis Walker is President of Walker Capital Management LLC. and Walker Capital Advisory Services, Inc., a Registered Investment Advisor (R.I.A.) Securities and certain advisory services offered through The Strategic Financial Alliance, Inc. (SFA).  Lewis Walker is a registered representative of SFA which is otherwise unaffiliated with the Walker Capital Companies. ▪ 3930 East Jones Bridge Road ▪ Suite 150 ▪ Peachtree Corners, GA 30092  ▪ 770-441-2603 ▪ lewisw@theinvestmentcoach.com