Tuesday, October 1, 2013

Mr. Market Is Yawning

Today’s temperate, thoughtful headline at the Huffington Post reads: “Congress Plunges Nation Into Chaos”. Uh-oh, are we facing Armageddon? Well, not according to the capital markets. Here is the telemetry as of noon on D-Day:

Stocks: up nicely
Bonds: down a bit
Gold: down a lot
Silver: way down

What is Mr. Market telling us? Well, first of all he is telling us that he is a bit confused, because if metals are down (signalling deflation), then bonds should be up. Presumably there are special factors creating this anomaly. Maybe the metallic community is waking up to the fact that hyperinflation is, shall we say, very remote.

In a larger sense, Mr. Market is yawning. He isn’t upset. That’s because he is ignoring the shutdown, as I said he should. The shutdown has zero information content for the equity and bond investor. Mr. Market is rational and doesn’t read the Huffington Post.

What Mr. Market actually cares about is:
1. The economic outlook, as it translates into corporate earnings growth. (Not so good; growth is slowing.)
2. The inflation outlook, as it translates into bond yields. (Good, inflation is very low.)

We will soon get the all the data on the third quarter, which will be brimming with information content. I expect it to show more of the same: weak growth and low inflation. This is not terribly bullish, but it’s no reason to sell stocks and go to cash or bonds. That’s because stocks remain cheap to other asset classes. In other words: you are being paid to own stocks, and you are being charged for holding bonds or cash.

What would make me bearish? Another recession, which I don’t expect, but which is possible given the low level of growth and the current fiscal headwinds. My advice* for now: do nothing, or buy equities on weakness. Don’t sell.
*Do not rely on my advice; I am not an investment adviser, I am a pundit.

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