The Seattle Seahawks had victory within their grasp. With only seconds left in the game, they were on the 1-yard line. If they scored a touchdown they would almost certainly win the game. And, they had one of the best running backs in the league. But they decided to throw a pass instead. The pass was intercepted and the New England Patriots won the game. That’s the moment where grown adults across the world were likely yelling at the TV (including me)! It was one of the best Super Bowl games I’ve seen in a long time!
Well, let’s check the stock market scoreboard and see how it looks just one month into the year. Through Friday’s close, the S&P 500 and NASDAQ Composite are down over 2% and the Russell 2000 and the Dow Jones Industrial Average are down over 3%. Those who have been invested in those markets probably feel like the Seahawks this morning.
On the other hand, U.S. Treasury Bonds have been doing very well. I have been advocating these for at least the last four months. The iShares Barclays 20+ Yr Treas.Bond ETF (TLT) is up +9.82% and the Vanguard Extended Duration ETF (EDV) is up +14.25%. Those invested in bonds so far this year are celebrating like the Patriots.
The underlying issue in the markets is that the economy isn’t doing as well as those in the financial media wanted us to believe. Do you remember President Obama in his State of the Union speech saying that our economy is growing at a rate of 5%? It’s not. It turns out that the US economy grew at an annualized rate of only 2.6% in 2014.
There are those of us who have followed a contrarian strategy that have avoided the volatility and heartache of those still fully invested in stocks. The value of US Treasury Bonds has soared, bringing very good profits to those who invested in them over the past few months. Rewind four or five months, and the majority of Hedge Funds and financial pundits were saying that interest rates were ready to go higher.
In fact, just about all the major Wall Street economists were predicting that the 10-Year US Treasury (TNX) would yield over 3% at the end of 2014. The yield on it started 2014 at 2.99%. It ended the year at 2.22%. And now (just 1 month later) it’s at 1.67%. That is a huge move in bonds and the pundits, in general, completely missed it.
Since the value of bonds goes up when the yield declines, those owning bonds during that time have seen some very attractive gains
All that’s fine, but where should you be invested now? Is it too late to buy more bonds? Should you be plowing your money into oil stocks since they’re down so much?
My advice is to continue to go with what has been working. Economies around the world have been slowing. Many of those pundits want you to believe that what happens in the rest of the world doesn’t affect the United States, but it does. And our economy continues to show signs of slowing, too. Slowing is another way of saying deflating. And in a deflationary environment you want to avoid things like stocks and high-yield junk bonds that act like stocks. Treasury bonds, high-quality municipal bonds and other stocks that act like bonds can be good choices. For example healthcare stocks or ETFs and/or REITS tend to be defensive and can do well in this type of market.
The problem is that investing in the stock market is as uncertain as lining up on the 1-yardline with only seconds left in the game. The unexpected can and will happen. The markets are very complex. Think of it as currents, undercurrents and crosscurrents being possible at the same time, and all in the same wave. And waves constantly come in and go out. So just because bonds have been on a tear doesn’t mean that it will continue forever. It is probable that they can retreat after such a strong run, but there’s no way to be certain. Until the economy starts to improve, though, it is likely that the overall trend of declining interest rates will continue. So I expect to add to that position when the retreat happens, while monitoring economic data.
It is not just about what to invest in, it is also about how much and when. Thanks for reading and have a great week.
Data Sheet year-to-date (through Friday):
S&P 500 (SPX) -2.62%
Russell 2000 (RUT) -3.26%
NASDAQ (IXIC) -2.12%
Dow Jones Industrial Average(.DJI) -3.69%
The VIX (measure of volatility) +9.22%
iShares Barclays 20+ Yr Treas.Bond (TLT) +9.82%
iShares Barclays 20+ Yr Treas.Bond (EDV) +14.25%
Vanguard Health Care ETF (VHT) +1.69%
Vanguard REIT Index ETF (VNQ) +6.85%
My Trending Indicators
US Stock Market Trending Down
Canadian Stock Market Trending Down
US Bond Yields Trending Down
Follow Jeff on Twitter: @JeffVoudrie
Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.
