The market was busy last month doing what it does best…..overreacting. Bonds fell 2 per cent in value in one month. Annualize that fall and you see what a huge drop that was for the “safer” asset class that investors consider bonds to be. By the end of the month, we saw stocks fall…..because the economy showed some signs of strength! Crazy??
I have long been pessimistic about bonds. We are somewhere near the end of a very long bull market in bonds. However, we are not at a place where interest rates are going to begin a steady, large climb. So, a 2 per cent move is a panic and not one based in reality.
The stock market has become addicted to low interest rates and Fed purchases of bonds. Signs of a strengthening economy spook the market as it fears an end of these policies. Yes, we fear going cold turkey! First, we are nowhere near the end of these policies. The economy and job growth are both far from robust. Second, the Fed can end easing when we have a robust economy and companies will not need the support of the Fed to thrive. That is a good thing!
Our most basic belief about markets it that they are not terribly rational in short time periods. This past month has been one of them. If bonds continue to get slaughtered in coming weeks, it will create a buying opportunity in bonds. That is something I did not expect to see in 2013!