The S&P 500 closed up 6.34% year to date and 3.56% in July alone. The Barclays U.S. aggregate bond index is +5.98% year to date.
Brexit fears did not last long. Negative interest rates in Japan and Europe continue as U.S. ten year bonds closed with a 1.45% yield. Also, 30-year Treasury bonds finished July with a 2.18% yield, near historic lows.
After two political conventions the race for the Presidency is less than 100 days away.
All politicians make promises but few keep them. The Congressional Budget Office reported in July that federal debt held by the public surged to 75% of GDP from 39.3% in 2008, according to the Wall Street Journal op-ed on Aug 1. The C.B.O. projects a jump to 86% by 2026 and 110% by 2036 higher than the historic peak of 106% after WW II.
"Low yields are hell on savers but they have allowed Mr. Obama and the Washington crowd to party like it's 1995; the year the government paid $232 billion in net interest, more than the $223 billion it paid last year, even though publicly held debt has more than tripled in 20 years."
"As a share of GDP, the U.S. is paying less in interest than the average over the past 50 years, even as debt has skyrocketed."
This is the result of repressed interest rates, compliments the FED and other Central bankers.
Global government debt has piled up with little negative consequence.
Bond gurus like Bill Gross of Janus and Jeff Gundlach of Doubleline Investments are sounding alarm bells on long dated assets including Treasuries and everything that trades off Treasury debt yields, except real estate and gold.
Bulls on the other hand argue that while we have been in a drawn out profit slowdown, the bottom in profits was reached late last year and earnings are improving.
Richard Bernstein argues that pessimism is rampant, stocks move on earnings increases and earnings are about to increase after 4 quarters of decline.
Earnings comparisons get easier in the second half of this year and in 2017. While P/E 's are high they are supported by rising earnings. Consensus forward earnings estimate on the S&P 500 is anticipated to be $126.50 a P/E ratio of nearly 17 times, higher than the 5 and 10 year averages.
We have lived through a collapse in oil prices and other commodities over the past 2 years. Oil prices went from $116 to $26 at the recent lows then rallied to $52 and dropped back to $40 this week.
We saw the SPX peak in May 2015 at 2134, surpassed last month after massive pessimism on the British vote to leave the EU proved to be fleeting.
Smart people are clearly divided in their opinions. Interest rates at historic lows have driven both stock prices and long duration bonds higher.
A subtle currency war is going on with China, Japan and Europe vis some vis the U.S. dollar.
At this point most prognosticators think bonds have done all they can, as far as capital appreciation is concerned. There are exceptions like Gary Shilling who sees even lower yields ahead.
Stocks will likely rise further, if earnings increase and P/E ratios remain elevated.
If we go into a U.S. or global recession, which JP Morgan rates at only a 30% probability, all bets are off.
Central bankers and the politicians, expect low interest rates for the foreseeable future.
Elections are looming in the U.S. and Europe which may change the investors calculations.
We shall monitor markets closely for evolving opportunities.
Doug Coppola
John Coppola
August 3, 2016
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