Stock Bulls, Bond Bears
The stock market continued its climb during the third quarter, rising in July and September while declining slightly in August. Through September, stocks, as measured by the S&P 500, are up nearly 20% for the year. Bonds rallied during the quarter, reversing course after a big selloff during May and June. Even with this rally, most bond indices remain negative on a year to date basis. Stocks have probably gotten a little over extended at this point and a pullback would not be a surprise during the fourth quarter. Longer term, however, stocks continue to look good, especially relative to bonds.
We have written a lot over the past few years about the bond market and the likelihood that interest rates would move higher. It appears to us that the thirty year bull market in bonds is over and, at the very least, interest rates will move back to a more normal level over the next few years. This is not a bad thing as it shows that our economy continues to improve. It is important to note that just because rates are rising and inflation may pick up, we feel that it is very unlikely that we will see interest rates move dramatically higher. A steepening yield curve (the difference between short term and long term rates) shows an economy that is expanding and is a good thing to see. Over the past sixty years, the yield on the ten year Treasury has never been more than 385 basis points higher than the Fed Funds rate. We do not see that changing.
There has been much discussion recently about the Federal Reserve's tapering program and when or if it will be wound down. In reality, the expectation of this happening probably has more impact on the markets than the program actually has on the economy. It seems that the markets react every day to new predictions and guesses. People tear apart every comment made by Fed members looking for some insight into what they are thinking and when they are going to act. There will likely be little effect when the tapering goes away. The other big news story of the week is the Government shutdown, which will hopefully be over by the time you read this. If our children acted like this they would be sent to their rooms without supper. Enough said......
Our custodian, Fidelity Investments, has created a new website for you to view your account online. You will continue to access the online view through our website, wabashcapital.com. You will click on the Fidelity button in the top, right hand corner of the homepage and complete the new registration by answering a few questions. Please feel free to call us if you experience any problems.
