Stocks jump on strong jobs report for January

[bamsphd]

Having a major index hit an 11 year high does not make me think a bull market is starting.

Emphasis added.

Why not?

The S&P was at an all-time high in 1980.

Twenty years later it was ten times as high again.

By its very nature a bull market makes new highs.

I don't think it is mathematically possible for the market to make a new high at the start of a bull market. If today is part of a bull market, and today's price is higher than yesterday's price, then the bull market may have started yesterday, or it may have started before yesterday, but it could not have started today.

It looks to me like the market has been going gang busters since the recent bottom in 2009. Personally, I don't fantasize about investing during a bull market. I fantasize about investing near the beginning of a bull market. While the market can certainly continue to go up from here, and can certainly set new highs (especially when not adjusted for inflation), if we are in a bull market, it started awhile ago.

 

[Hamlet]

Well, by that logic, 1980 was hardly the start of a bull market, since the market had doubled off of the bottom of 1974.

It was still an amazingly good time to start investing. I'll happly take 20 years of double digit returns.

The PE's of many large companies are roughly 10 (giving an earnings yield of 10%), compared to a risk free rate of return of less than 2%.

In this interest rate environment, stocks could double from here and they wouldn't look particularly expensive compared to bonds or cash.

Great bull markets start with low valuations based on fears that don't come to pass. We have low valuations, and a lot of fear. If the future turns out better than people expect, we could see amazing returns over the next decade. Even if it turns out relatively bad, we may still see acceptable returns.

I'd rather own stocks today than cash, bonds, or gold. Real estate may be a viable alternative as well, but it is a lot more work.

Emphasis added.

I don't think it is mathematically possible for the market to make a new high at the start of a bull market. If today is part of a bull market, and today's price is higher than yesterday's price, then the bull market may have started yesterday, or it may have started before yesterday, but it could not have started today.

It looks to me like the market has been going gang busters since the recent bottom in 2009. Personally, I don't fantasize about investing during a bull market. I fantasize about investing near the beginning of a bull market. While the market can certainly continue to go up from here, and can certainly set new highs (especially when not adjusted for inflation), if we are in a bull market, it started awhile ago.

 

[bamsphd]

Well, by that logic, 1980 was hardly the start of a bull market, since the market had doubled off of the bottom of 1974.

Based on some quick games with Yahoo charts for the S&P 500, it looks like 1980 started with something that resembled a bear, before it went on to have some really nice decades of performance.

• Feb 13th, 1980 = 118.44
• Mar 27th, 1980 = 98.22

In our own time, I would say you can make a reasonable case that a bull market started in

• Nov 2011
• Jun 2010
• Mar 2009

However, I do not see a reasonable case for a bull marking starting on February 3rd, 2012.

I certainly agree that you have to hold your nose to buy cash and bonds in this environment. I really had to hold my nose tightly to purchase NEGATIVE real yield 5-year TIPS last spring at auction for my TIPS "emergency fund" ladder. It looks like I'll be holding my nose again this year. However, that is not enough reason for me to go 100% equities. I still need an "emergency fund" to sleep well at night, which means I must own some cash and/or bonds. At least my TIPS still out perform my mattress.

I also agree that "blood in the streets" is the best time to buy. Which at the moment means Europe is probably the place to invest. However, I don't actually know the future. Fortunately, I know I don't know the future. So I basically try to use a pick your allocation and stick with it as you ride the roller coaster approach. However, I also accept that I might not pick today the perfect allocation for the rest of my life. So I try to establish some rules that let me change my allocation in the future, without tempting me to buy high or sell low. It ain't perfect, but I still like my rule that I can lower my allocation when the market has gone up for a year or more, and can raise my allocation when the market has gone down for a year or more. What works for you may be different.

 

[Hamlet]

My point is that I'm not really concerned about being at the absolute beginning if the market is poised to have good over-all returns for the next decade or two.

You point out a large drop in 1980, but it really didn't matter in the long run, did it? Someone buying in 1980 could have picked the absolute worst day of the year to buy, and twenty years later they were still happy campers.

Based on some quick games with Yahoo charts for the S&P 500, it looks like 1980 started with something that resembled a bear, before it went on to have some really nice decades of performance.

• Feb 13th, 1980 = 118.44
• Mar 27th, 1980 = 98.22

In our own time, I would say you can make a reasonable case that a bull market started in

• Nov 2011
• Jun 2010
• Mar 2009

However, I do not see a reasonable case for a bull marking starting on February 3rd, 2012.

 

[Hamlet]

I'm not arguing against anyone maintaining a sensible asset allocation over the long haul. I think bonds are likely to give very bad returns over the next five years, but anyone who has been invested in them over the last decade has done incredibly well, and as long as they've rebalanced over the years they are so far ahead on them that they will still be doing fine if they do poorly for a few years.

I would argue against taking this moment to dramatically increase their bond allocation percentage though.

I'm not switching to 100% equities, I've been there for almost a decade (outside of my emergency fund). I missed the run-up in bonds, but I'm not going to jump into what appears to be a bubble to me.

I feel much safer buying large multinational companies today at 10-12 times earnings than buying 10 year treasuries that yield less than 2% interest. If bonds get back to prices that I feel will yield positive real returns over the long term, I will ease my way into holding a few.

I certainly agree that you have to hold your nose to buy cash and bonds in this environment. I really had to hold my nose tightly to purchase NEGATIVE real yield 5-year TIPS last spring at auction for my TIPS "emergency fund" ladder. It looks like I'll be holding my nose again this year. However, that is not enough reason for me to go 100% equities. I still need an "emergency fund" to sleep well at night, which means I must own some cash and/or bonds. At least my TIPS still out perform my mattress.

I also agree that "blood in the streets" is the best time to buy. Which at the moment means Europe is probably the place to invest. However, I don't actually know the future. Fortunately, I know I don't know the future. So I basically try to use a pick your allocation and stick with it as you ride the roller coaster approach. However, I also accept that I might not pick today the perfect allocation for the rest of my life. So I try to establish some rules that let me change my allocation in the future, without tempting me to buy high or sell low. It ain't perfect, but I still like my rule that I can lower my allocation when the market has gone up for a year or more, and can raise my allocation when the market has gone down for a year or more. What works for you may be different.

 

[Midpack]

I'm not arguing against anyone maintaining a sensible asset allocation over the long haul. I think bonds are likely to give very bad returns over the next five years, but anyone who has been invested in them over the last decade has done incredibly well, and as long as they've rebalanced over the years they are so far ahead on them that they will still be doing fine if they do poorly for a few years.

Could very well be, but I'm at a loss to understand how bonds will provide "very bad returns" over the next few years with the Fed position, unless they abruptly and radically change course. If you mean vs historical returns on bonds, yes. But vs alternatives like cash or CD's, I don't see how. Somewhere near or after 2014, bond returns could indeed be awful if interest rates increase dramatically. I'd be interested in learning more...

The Federal Reserve announced today that it expects to keep interest rates near zero percent at least through late 2014. The rate has remained at this record low since the financial crisis took hold in 2008.
In a statement on Wednesday, the Federal Reserve’s monetary policy-making group, the Federal Open Market Committee (FOMC), said it is keeping the target range for the federal funds rate at zero to 1/4 percent and said that economic conditions “are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.”

 

[Hamlet]

Well, inflation for the last year has been over 3%, so if that continues bonds are set to give negative real returns.

Unless rates go lower (very difficult from here), or we get actual deflation (very difficult in a world that can print money), the upside of bonds is very limited.

The downside could be dramatic from here, though.

If the labor market picks up and the economy gets going again, we could easily end up in a situation where the Fed is forced to raise rates, regardless of their promises.

Even if the Fed doesn't raise rates, if people stop getting returns from bonds juiced by failing rates, they are likely to start demanding returns from the interest itself that keep up with inflation. If the ten-year treasury were to drop so that it yields 3.00% rather than < 2.00%, that translates into double-digit negative returns.

So I see little upside, and potentially large downside in most bonds.

Could very well be, but I'm at a loss to understand how bonds will provide "very bad returns" over the next few years with the Fed position, unless they abruptly and radically change course. I'd be interested in learning more...