Are we missing something?

[Cardboard]

Since the election of Trump, the move in the stock market, treasury market, USD, copper and some other commodities is huge. I have a really hard time explaining all of this purely based on the election of one guy who is not even in office yet and some campaign promises.

 

The stock market will go into weird gyrations sometimes but, the bond market tends to be led by more cautious people. The TLT ETF is down 16% since its peak in July and 7.5% since Trump election. So I would think that there is something at work that is bigger than Trump (or Hillary) and that was already in place since the peak.

 

I see no real change in economic growth rate since July. Do you?

 

As value investors with our reversal to the mean thinking we often brush aside things like that by saying that the bond market simply returned to the level of a year ago. However, we can't dismiss that this was a really big and sharp move with $100's of billions of losses indicating possibly something very different in the not too distant future.

 

Cardboard

[maybe4less]

Since the election of Trump, the move in the stock market, treasury market, USD, copper and some other commodities is huge. I have a really hard time explaining all of this purely based on the election of one guy who is not even in office yet and some campaign promises.

 

The stock market will go into weird gyrations sometimes but, the bond market tends to be led by more cautious people. The TLT ETF is down 16% since its peak in July and 7.5% since Trump election. So I would think that there is something at work that is bigger than Trump (or Hillary) and that was already in place since the peak.

 

I see no real change in economic growth rate since July. Do you?

 

As value investors with our reversal to the mean thinking we often brush aside things like that by saying that the bond market simply returned to the level of a year ago. However, we can't dismiss that this was a really big and sharp move with $100's of billions of losses indicating possibly something very different in the not too distant future.

 

Cardboard

 

Trying to explain market moves is always dangerous, but I'll give it go.

 

First of all, it's a little misleading to look at the percentage changes in the price of long-dated bonds like those in TLT. With rates so low, bond durations have extended significantly. With TLT's duration in the high teens, small moves in rates will have a big price impact. $100s of billions in market value have been lost because duration is very high and the bond market is huge.

 

It's also important to point out that these moves are not that unusual. For example, there has been at least one 50+ bps point move in the 10-yr Treasury every year since the crisis, and looking back further, such moves seem equally common: https://fred.stlouisfed.org/graph/fredgraph.png?g=bSE4

 

 

 

10-yr breakeven inflation expectations have increased this year from a low of about 1.2% in February to 1.90% today. And only about 15 bps since Trump was elected. So if you want to attribute a 50 bps rise in the 10-yr to Trump, then perhaps the market is saying that he will increase inflation by 15-20 bps and real GDP growth by 30-35 bps. Meaningful if it happens, but perhaps not earth shattering.

 

Despite the volatility in rates post-crisis, US real GDP growth been remarkably stable at about 2.1-2.2%, while inflation, as measured by the PCE deflator, has been between roughly 1.5% and 2%. The 10-year is now at 2.3% after having been as low as 1.4% this year. Which is more consistent with the recent fundamentals? I'd argue that rates had undershot and are now going back to more appropriate level.

 

There has been a tremendous amount of risk aversion in the markets and maybe investors are realizing the outlook isn't so negative.

[Viking]

I find listening to Jeff Gundlach and Stanley Druckenmiller fascinating. Both are of the opinion that we may have seen the bottom in long bond yields. They see 2.35% as a key level on the 10 year, with another leg up very possible. Watsa sold all of his long bonds and also reduced equity hedges 50%.

 

My read was we are in a bond bubble. Trump getting elected perhaps simply provided the final nail in the coffin for the bond market (as his policies are perceived as being more negative for bonds than Clinton). When 10 year US Treasuries dropped to 1.4% earlier this year everyone who wanted to own long dated government bonds likely had bought.

 

The interesting thing is where we go from here. Should yields on the US 10 years move meaningfully higher from current levels (of 2.35%) then the bond bear market may be officially on. And then what higher yields do to the US economy etc, etc will be fascinating to watch.

 

Investment portfolios will be turned on their heads. Bonds have gone up for 30 years (as yields have fallen). Hard to see stock averages going up a great deal from current levels (PE's are already elevated). Perhaps we will have 5 years of a sideways market... Stock selection will likely be key moving forward (similar to when Lynch was running Magellan back in the '80's).

[Parsad]

Since the election of Trump, the move in the stock market, treasury market, USD, copper and some other commodities is huge. I have a really hard time explaining all of this purely based on the election of one guy who is not even in office yet and some campaign promises.

 

The stock market will go into weird gyrations sometimes but, the bond market tends to be led by more cautious people. The TLT ETF is down 16% since its peak in July and 7.5% since Trump election. So I would think that there is something at work that is bigger than Trump (or Hillary) and that was already in place since the peak.

 

I see no real change in economic growth rate since July. Do you?

 

As value investors with our reversal to the mean thinking we often brush aside things like that by saying that the bond market simply returned to the level of a year ago. However, we can't dismiss that this was a really big and sharp move with $100's of billions of losses indicating possibly something very different in the not too distant future.

 

Cardboard

 

We've learned two important lessons in the last 8 years:

 

#1 - Unless you're leveraged, don't try and understand macroeconomics and how it will affect your portfolio.

#2 - Stick to Ben Graham and buying with a margin of safety, regardless of what is going on around you...then sell and hold cash when the investment reaches intrinsic value.

 

Why?

 

You may get lucky with #1 at one point, but then you may look foolish for years afterwards when you do get it wrong...we've seen this with many, many value managers.  #2 isn't exciting, but it works very well!  Cheers!

 

 

[rb]

We've learned two important lessons in the last 8 years:

 

#1 - Unless you're leveraged, don't try and understand macroeconomics and how it will affect your portfolio.

#2 - Stick to Ben Graham and buying with a margin of safety, regardless of what is going on around you...then sell and hold cash when the investment reaches intrinsic value.

 

Why?

 

You may get lucky with #1 at one point, but then you may look foolish for years afterwards when you do get it wrong...we've seen this with many, many value managers.  #2 isn't exciting, but it works very well!  Cheers!

Wise words to live by!

 

However, I'll indulge in a bit of macro since it's my wheelhouse. I'd say that we're not missing anything. What's happened since the election is very consistent with what you'd expect to happen in an economy that is somewhere in the neighborhood of full employment and is expecting to see a large fiscal stimulus package.

 

The market moves themselves haven't been that large but they've been very quick. What's also changed is a lot of the commentary. Considering the environment we're in this could be a big case of buy the headline sell the news. The markets are basically pricing up front in a stimulus package coming in. But no one knows what the package is or whether it will be a meaningful package. With these things the devil's always in the details.

[Uccmal]

 

 

Investment portfolios will be turned on their heads. Bonds have gone up for 30 years (as yields have fallen). Hard to see stock averages going up a great deal from current levels (PE's are already elevated). Perhaps we will have 5 years of a sideways market... Stock selection will likely be key moving forward (similar to when Lynch was running Magellan back in the '80's).

 

I dont think markets do sideways for very long.  I dont see anything on here that looks flat: 

 

http://www.macrotrends.net/2324/sp-500-historical-chart-data

[rb]

I dont think markets do sideways for very long.  I dont see anything on here that looks flat: 

 

http://www.macrotrends.net/2324/sp-500-historical-chart-data

Thanks for the link. I really like the site.

 

Looking at the charts one thing is clear: It really, really sucked being an equity investor in the 1970s!

[Txvestor]

 

 

Investment portfolios will be turned on their heads. Bonds have gone up for 30 years (as yields have fallen). Hard to see stock averages going up a great deal from current levels (PE's are already elevated). Perhaps we will have 5 years of a sideways market... Stock selection will likely be key moving forward (similar to when Lynch was running Magellan back in the '80's).

 

I dont think markets do sideways for very long.  I dont see anything on here that looks flat: 

 

http://www.macrotrends.net/2324/sp-500-historical-chart-data

 

I think rb nailed it. Add to that is the fsct that a single party controls all 3branches of gov't and can therefore claim a mandate to make meaningful chnages and actually get something done, and you can explain the optimism. That said there are a lot of unknowns, how effective will trump be, how will he govern, what geopolitical instability might he stoke etc. etc. however at this time mr market is liking the single party control and very high likelihood of a large fiscal stimulus and tax reform.

I don't think it is mich more complicated than that.

[Packer16]

The potential in providing a lower tax rate in the US versus the rest of the world is huge.  With a higher tax rate  in the US versus overseas the incentives to invest overseas was large.  With this change coupled with a lower repatriation tax will cause an investment boom in the US.  Now one party control, all this can get done.  At a CFA conference last week, this was the gist of one of the presenters presentation.  In effect, the incentives are turned on their heads.

 

Packer

[Partner24]

Sanjeev:

 

"You may get lucky with #1 at one point, but then you may look foolish for years afterwards when you do get it wrong...we've seen this with many, many value managers.  #2 isn't exciting, but it works very well!  Cheers!"

 

You're absolutely right. We don't care about excitement, or terrific predictive abilities, etc. What do we care about is long term value creation. I would even say that beside that, if it's boring and simple, it's even better.

 

Cheers!

[HJ]

The market at large basically changed from a modest deflationary stance to a modest inflationary stance in the US.  The political agenda is domestically driven.  But US is not the only market.  EM's for the most part are down since the crisis, even some commodities has been up, which hasn't always been the case.  USD is at multiyear highs.  So somewhere in the world this has not been all Santa Claus.

 

Truth is we've been used to the past 8 years in the US of a set of policies (here I'm mostly thinking environmental regulation and financial regulations), not recognizing how much of a wet blanket it has been on growth.  With this presumably to be lifted at least somewhat, and a set of policies with the fullest intention of driving US domestic industrial activities, the narrative of the market has changed for now.

[Kapitalust]

Looking at the charts one thing is clear: It really, really sucked being an equity investor in the 1970s!

 

Reminds me of the Buffett quote from 1974:

 

How do you contemplate the current stock market, we asked Warren Buffett, the sage of Omaha, Neb.

 

"Like an oversexed guy in a harem,” he shot back. “This is the time to start investing."