While the stock market is the only game in town – for now – stocks will not continue to out perform all other asset classes indefinitely. Eventually either bonds and gold will rally or stocks will crash very hard. It is one, the other, or even more likely, a mixture of both.
So says Tiho Brkar (theshortsideoflong.com) in edited excerpts from his original article* entitled Stock Market Only Game In Town… For Now!
[The following is presented by Lorimer Wilson, editor of www.munKNEE.com and the FREE Market Intelligence Report newsletter (sample here). The excerpts may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. This paragraph must be included in any article re-posting to avoid copyright infringement.]
Brkar goes on to say in further edited excerpts:
As Chart 1 below shows perfectly well, all assets take turns whether they are outperforming or under-performing, as liquidity constantly shifts from overvalued to undervalued assets. Contrarians tend to buy value in anticipation of a trend change, while trend followers chase momentum. Contrarians are usually early to the game, while trend followers are late leaving it.
Chart 1: US stocks outperform Bonds and Gold by a large margin in 2013
Source: Short Side of Long
The chart above tries to do a decent job at presenting the basic returns in the global macro investment world of finance. S&P 500 represents equities, 30 Year Treasuries represent bonds and Gold represents commodities / hard assets.
A simple conclusion one can make is that on a three-asset preferred basis, equities have vastly outperformed bonds and commodities over the last 12 to 24 months. On an annualised basis, SPY ETF is up over 28%, while TLT ETF and GLD ETF are down 16% and 29% respectively.
Chart 2: Gold vs. Stocks Mispricing
Things become even more interesting when we compare these three assets on the relative basis. The ratio below in Chart 2 is between Gold and Stocks. When the price is rising, Gold is outperforming and when the price is falling Stocks are outperforming.
The chart shows that the current relative under performance by Gold against Stocks is a huge 45% on annualised basis. This is the worst performance Gold has posted during a stock market rally since the early 1980s. It is not only Gold but also Silver down 53% relative to S&P, Corn down 56% relative to S&P, Coffee down 45% relative to S&P, Wheat down 40% relative to S&P, Copper down 40% relative to S&P and so forth! The whole commodity sector is extremely oversold.
Source: Stock Charts (edited by Short Side of Long)
Chart 3: Bond vs. Stocks Mispricing
As can be seen in Chart 3 below, which shows the data going back to early 1980, a very similar condition is also present in the Treasury bond market too.
Bonds have under performed stocks by almost 32% over the last 12 months. There has been only a handful of times over the past 30 years that bonds have done even worse and here’s what happened during those dates:
- In 1981 bonds became extremely oversold and rallied from their secular low
- In 1987 bonds outperformed as the global stock markets crashed
- In 2000 bond rallied but even more importantly stock markets crashed
- In 2010 bonds rallied while the stock market went through a flash crash
All assets take turns whether they are outperforming or under-performing, as liquidity constantly shifts from overvalued to undervalued assets so, as they frequently say in my favourite bar, “Pick you poison!”
[Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.]
Whenever the Fed has decided to reduce the extent of their purchases of “agency” debt products, the SP500 also declined in a dramatic way. [As such,]… it makes it extremely important to contemplate a “tapering” off in the rate of growth of Fed assets, or even an outright end to quantitative easing (QE). [Indeed, if you own stocks you may well want the Fed QEternity program to be just that – to eternity – in spite of the inflation that will surely follow.]
I would think that we are probably in the slow build-up to something interesting – a badly overpriced market and bubble conditions. My personal guess is that the U.S. market, especially the non-blue chips, will work its way higher, perhaps by 20% to 30% in the next year or, more likely, two years, with the rest of the world including emerging market equities covering even more ground in at least a partial catch-up.
One look at the chart below clearly illustrates that owners of Government bonds need all the help they can get right now!
Many events moved the market this month which are all very bullish for gold. In addition, gold’s leading indicator is currently at a major low area all of which strongly reinforce the likelihood of an upcoming sustained rise. Let us explain.