As 2016 draws to an end, the stock market moves from strength to strength. The global bond market is another story.
For many years now, the investment world adopted the thesis of an efficient market and the premise that it’s better to own a piece of the market than to try to outperform it.
As such, institutions (i.e., the so-called “smart money”) and individual retail investors have flocked to index instruments as a way to reduce costs and still earn market returns.
Over the last few months, however, correlations between market returns and specific asset performance have come way down.
What this means, in my opinion, is that people like myself, the dreaded stock picker, have more opportunities to earn returns different than what the standard index will deliver.
Of course, a rising tide lifts all boats, raising the question of whether it’s an ideal time to dive into the market waters.
Not necessarily, as the specific stocks and sector you own can make a huge difference to performance.
Now, when the currents get a little stronger, will things be different?
Efficient market theorists believe over any long-term time frame, stock picking is futile. Yet in the short term anything can happen.
What about in 2017 and beyond?
If we turn our gaze to the global bond market, the European Central Bank (ECB) recently decided to taper its monthly bond purchases but will extend the duration at least to the end of 2017.
Domestically, the slow hiss of a major leak in the bond market bubble gets louder by the day as the 10-year bond yield now stands at nearly 2.6% as of December 16. Major bond investors believe the bull market in fixed income isn’t dead yet and would note as long you own the bonds to maturity, your capital is safe.
Of course, the length of the bond and your willingness to not trade in an asset that loses value daily is the key issue.
You may recall many participants love the idea of buying low and selling high, or selling high and buying back low.
Bonds have been in a bull market for thirty years.
The incoming Trump administration is vowing massive deregulation, big tax cuts, fiscal stimulus, capital repatriation and more.
In my opinion, it’s hard to see how interest rates don’t keep going up, maybe gradually, maybe sharply.