|
|
|
|
bullishness
of the stock market prognosticating a robust economic
and profit rebound for the U.S. economy before the end of
2003.
Bond investors fear robust economic growth as it often presages
inflation eroding the interest income that bond investors
receive over time.
The longest maturities are the most sensitive to inflationary
fears and as such, usually bond prices decline and interest
rates rise more aggressively for the longest maturities.
Bond investors that bought long-term bonds during the past
couple of years as a respite from the stock market watched
in disbelief as their bond portfolios plummeted more than
10% in value in August.
Ironically, mutual fund liquidations of bond mutual funds
were very strong throughout August. Individual investors
sold their bond mutual funds that were on a free-fall, and
purchased stock mutual funds with a frenzy.
These investors forgot that stocks are risky investments,
and even more risky if you buy them at prices based on historically
high valuations.
Investors bid up stocks higher and higher throughout August,
forgetting the trillions of dollars of painful losses that
|
|
|
|
|
|
|
|
|
|
|
they
incurred as a result of the stock market crash that began
in 2000.
The "quality of earnings" were no longer important to investors
who instead were more focused on being left behind
as many stock prices continued to climb.
It is always amazing to me how greed can overtake fear as
the prominent force that directs investors' behavior.
September began for the stock market the same way that it
ended August that is up, up, and away, as the bulls mauled
the bears.
However in early September, the bulls started losing some
of their roar, leaving most major stock market indexes range-bound
throughout most of the month.
The bears finally got the upper hand by the end of September,
as most major stock market indexes finished that month with
their first monthly decline since February of this
year.
The bond market took its cue from the stock market during
September, that is going up as the stock market went down.
Most of the losses that the bond market took in June, July,
and August, were reversed by the end of September, leaving
interest rates near their four decade low again.
The foreign stock markets
|
|
|
|
|
|
|
|
|
|
|
have
been in lock step with the
U.S. stock market throughout 2003, including the third quarter.
Foreigners theorize that since the U.S. economy is the growth
engine of the world economy, if the U.S. economy does in
fact rebound by the end of 2003 (as many stock market investors
are betting on), then growth and profits will prevail in
the global economy. Since profits (earnings) are the
elixir for stock prices, then stocks are sure to continue
to rise.
I am not convinced that the U.S. economy
will rebound any time soon. The U.S. economy continues to
shed jobs, there is still little if any pricing power
for many companies in many sectors, and the only thing
that supports the consumer are historically low interest
rates to finance their purchases, and to buy their homes.
Furthermore, the geo political landscape is still littered
with minefields in Iraq, Afghanistan, North Korea, and Israel.
I remain committed to short-term investment quality bonds,
energy and gold mining stocks, as the core holdings for
the portfolios that I manage on behalf of my clients until
a clearer picture emerges as to the direction of the U.S.
economy.
|
|
|
|
|
|
