Sat | Jun 12, 2021

The Goldilocks market

Published:Sunday | March 18, 2012 | 12:00 AM

It's the Goldilocks market; everything seems just right. Stocks are up, but they may have room to rally further, at least if you believe a popular gauge of their value. Companies are selling more bonds than ever, but not so much to send prices tumbling and end their remarkable run.

Even indebted Europe is offering investors big profits lately. Stocks are at eight-month highs in Germany and France and are up 12.4 per cent this year in Greece, of all places.

Credit a delicate balance when the economy is neither too hot nor too cold. Prices of myriad assets that might otherwise be moving in opposite directions are nearly all moving up.

"People are upbeat," says Martin Fridson, global credit strategist at BNP Paribas Investment Partners. "The glass is half-full."

For investors who own stocks and bonds, half-full is exactly what they need. If the economy were roaring ahead, stocks might rise, but maybe not bonds. Fear of inflation in a hot economy can lead investors to sell bonds and push prices down fast.

Not this year, though.

Dow up 8.3 per cent

The Dow Jones industrial average is up 8.3 per cent this year. Bonds of various kinds are rallying, too - municipals issued by cities and states, junk bonds from the riskiest of companies, and even that once most hated and destructive of Wall Street products, mortgage-backed securities. They've eked out a 0.36 per cent gain so far this year, according to Barclays Capital.

If you suspect it's too good to be true, you may be right. Some worrisome signs:

Profits may not be growing: Companies in the Standard & Poor's 500 stock index are expected to earn 0.5 per cent less than they did a year ago for the first three months this year, according to FactSet, a data provider.

Insiders are selling: Corporate executives are selling 14 times more of their own companies' stock than they are buying, according Trim Tabs. The normal rate is eight times.

IPOs are still anaemic: Companies aren't going public at a pace associated with a bull market. So far this year, companies have raised $3.4 billion in IPOs, down 78 per cent from a year ago, according to Renaissance Capital.

Then there was the scare this week that inflation may be looming at last. Treasury prices fell, and their yields, which move in the opposite direction, rose fast. The yield on the 10-year Treasury note closed Friday at 2.3 per cent, the highest since October and up nearly a third of point in five days.

The 10-year helps set rates for everything from mortgages to credit cards to auto loans, and a rise can sometimes scare investors into selling bonds issued by companies.

But in a land where the porridge is at the perfect temperature and the beds are just firm enough, investors shrugged off the Treasury scare.

Instead of falling, junk bonds issued by heavily indebted companies rose. So far this year, they have returned 5.4 per cent, including interest.

no recession fears

Those fears from last summer of another US recession? A distant memory. Investors have poured a record US$17 billion into mutual funds that buy junk bonds in 2012, according to Lipper Inc, a financial data provider.

There was plenty of good news last week. Unemployment claims fell to 351,000, matching a four-year low. The US Federal Reserve signalled that the economic recovery was gaining steam.

Apple rose seven per cent and closed Friday at US$585. Just a year and a half ago, it was trading at half that price. And the Nasdaq broke through 3,000 for the first time since the dot-com days more than a decade ago.

Jack Ablin, chief investment officer of Harris Private Bank, is optimistic stocks will keep climbing. Still, he plans to start selling when the S&P 500 hits 1,450, less than 4 per cent higher.

He notes that individual investors, as opposed to pension funds and other institutions, have been pulling money out of the market, and that worries him.

"I'd rather leave a little cash on the table than get caught in a downdraft," he says. "I don't know where these gains are coming from."

One place to look is central banks around the world. They have kept rates at record lows, lent to banks or bought government bonds or other securities. That has put cash in the hands of the sellers, who can turn around and buy stocks and other assets.

As it's bought over the past 3.5 years, the balance sheet of US Federal Reserve has tripled to nearly US$3 trillion.

Fridson of BNP Paribas says the rise in Treasury yields this week is a good sign that the economy is indeed bouncing back. And he doesn't seem troubled that companies are issuing debt now at record levels—US$380 billion so far this year.

Still, he says some companies are trying "to sell bonds that don't fully reflect the risk," so he thinks investors should be cautious. Always good advice in fairy tales.

"You have to be on your toes," he says.

- AP

Market close Friday:

Dow

13,232.62 -20.14 -0.15 %

Nasdaq

3,055.26 -1.11 -0.04 %

S&P 500

1,404.17 +1.57 +0.11 %