The trajectory of the U.S. stock market over the past decade has been unprecedented. The S&P 500, having bottomed at 666 on March 6, 2009, has surged over 370 percent, regularly hitting new highs.
Throughout this period, many investors have come to think the stock market is perpetually in an upward trend, believing that investing blindly in an S&P 500 ETF guarantees financial success. However, this mindset may soon face a harsh reality check. One can be certain of that.
In the meantime, the bull market may persist a little longer—or it may not. It is important to note, however, that following a 370 percent increase, investing in the S&P 500 is largely a gamble on future pricing. Here’s the reasoning behind this perspective…
In the last decade, the U.S. economy—measured by nominal gross domestic product (GDP)—has grown by about 50 percent. This signals a lackluster growth rate in contrast to the soaring S&P 500. Corporate earnings have not kept pace with stock prices. Continue reading
Recently, Bank of Japan (BOJ) Governor Haruhiko Kuroda stated that Japan’s central planners are contemplating a new 50-year government bond as a long-term strategy to stabilize super-long interest rates. The feasibility of this approach, however, is quite questionable; further details will follow. First, let’s outline the purported benefits from Japan’s central planners…
The introduction of a 50-year government bond is expected to allow the government to secure long-term funding at low rates. Additionally, this strategy would potentially provide yield-starved investors with better returns. Low-cost funding and enhanced yield—what’s not to appreciate?
Kuroda’s decisions are often regarded as erratic. Following a bubble in Japan’s real estate and stock markets in the late 1980s brought about by cheap credit, Kuroda and his colleagues have relentlessly sought ways to re-inflate asset prices for almost three decades now.
The BOJ has pioneered a range of unconventional monetary policies in its quest to save the nation from its economic predicaments. Continue reading
The allure of receiving something for nothing is always captivating. Who wouldn’t want a stress-free financial reward? The desire for slightly higher yields above the 10-year Treasury note without any additional risk is equally appealing.
This allure drives savvy investors to pursue financial innovations with relentless enthusiasm. The underlying belief is that if risks are sufficiently diluted, they will ultimately vanish. In simpler terms, they think, “the solution to pollution is dilution.”
To achieve this, new financial products are constantly being created. These additional basis points of yield are then bundled into debt instruments and sold to pension funds and institutional investors, all spurred by the ongoing quest for yield.
However, as an economic expansion continues—especially one distorted by the Fed’s cheap credit—these newly minted financial securities become increasingly tainted with risk. The sprawl of risk ultimately contaminates the entire liquidity pool. Continue reading
The prolonged bull market has not only generated significant wealth but has also introduced a range of new competencies to the financial landscape. The rapid rise of ETFs, for example, has created a booming environment for ETF analysts. Concurrently, an over-reliance on data has given rise to a new breed of “Psychic Quants,” who interpret the future through models based on historical data.
For major financial institutions, mastering systematic—pre-programmed—delta hedges is becoming a mandatory skill set for the 21st century. Nevertheless, it’s likely that many of today’s high-flying assets will take a nosedive during the next bear market. But then again, who can say for sure?
As it stands, the stock market in November 2019 feels surreal. The Dow Jones Industrial Average (DJIA), S&P 500, and Nasdaq seem increasingly disconnected from the real economy, continuing to rise regardless of prevailing conditions.
Market analysts, keen to explain this unprecedented situation, employ imaginative terminology to classify the stock market’s state. Is it a bubble? Is it a melt-up? If it is indeed a melt-up, what type does it represent? Continue reading
