Better Than Best

Asset prices were high months ago and as stock prices continue to set records what appeared to be best is now better than best. What a great period to have been an investor!

Bond prices have been higher (and interest rates lower) but not appreciably. While prices have trended lower since their Labor Day high prices and low yields (per Bloomberg), movement so far is at the speed of a glacier.

Gold prices are also near their highest since their 2011 peak of $1921, trading at $1611 earlier this month. And then there are stocks, which appear to be in their own stratosphere. In my November letter I noted how both bonds and gold spurted about twenty percent to their peaks. I didn’t give stocks a chance for a similar nod; I was wrong.

I just returned from a visit to Washington, DC. The trip was tremendously worthwhile. Washington provides a sense of history as well as optimism and perspective. For many months I have written about what comes next. It is natural that prices correct to the downside after a run-up, particularly a significant run up. So no matter your feelings or thoughts on the subject, we haven’t repealed the fact that markets behave like markets.

The next move is down for asset prices. It appears to me the top has been in for bonds and now recently for gold. Nothing new here, nor is there anything new for stocks as they continue and will continue higher…until they no longer do.

Low interest rates are both the cause and the problem. I am assuming (have assumed for many years) that bond prices have peaked and that means interest rates should move higher. Looking back over the past five months it is obvious higher rates don’t (haven’t) caused any problems for stock and gold prices, then perhaps significantly higher rates are what is in store.

Bond prices, like stock or gold prices, decline for many reasons. So far I haven’t given you any reasons why other than this is how markets move. It is more important for me to get the direction right rather the why.

In 2008 the why wasn’t important; being out of your stock and bond investments was what was important. The why took care of itself and do we really care whether the mortgage market was to blame?

We need perspective because it has been almost eleven years since the depth of the financial crisis, but more importantly, it was 2007 when stocks peaked, 2005 when bonds peaked and 2011 for gold.  I can’t remember a time when all three were peaking together.  Asset prices appear better than best.

So as others, at some point, may begin to look for safe haven assets, remember that in general they do not exist. Buying bonds will not be a safe haven for stock investors. Buying gold will not be a store of value. Prices of these assets have (when stocks finally end their run) peaked and therefore a safe haven will be difficult to find.

We will continue to work our Select Approach to find you investments that make sense in today’s low interest rate (and high asset price) environment as well as the changing environment of the coming days. With peak pricing for bonds and gold behind us, we watch stock prices closely for their similar peak.

I do not know whether bonds or gold will undergo a significant price decline before stocks peak or after. Nor do I know why or what reason asset prices will decline in the coming months. But I do believe stocks, bonds, and gold prices are subject to market forces and down follows up. It always has.

Conroe Independent School District, TX

Aaa (Aa1 Under) Moody’s AAA (AA+ Under) Standard & Poor’s

Permanent School Fund Guaranteed

Due 2/15 Dated 2/1/20 Maturity 2/15/2045

$116,125,000 Sold

1 2021 5.00% 0.98%
2 2022 5.00% 1.00%
3 2023 5.00% 1.03%
4 2024 5.00% 1.05%
5 2025 5.00% 1.09%
6 2026 5.00% 1.20%
7 2027 5.00% 1.28%
8 2028 5.00% 1.35%
9 2029 5.00% 1.42%
10 2030 5.00% 1.51%
11 2031** 5.00% 1.60%
12 2032** 5.00% 1.65%
13 2033** 4.00% 1.85%
14 2034** 3.00% 2.16%
15 2035** 3.00% 2.23%
16 2036** 3.00% 2.29%
17 2037** 2.50% 2.50%
18 2038** 2.55% 2.57%
19 2039** 2.55% 2.61%
20 2040** 2.625% 2.65%
21 2041** 2.625% 2.69%
25 2045** 2.75% 2.80%

* Yield to Worst (Call or Maturity) ** Call 2/15/2030

Source: Bloomberg

This is an example of a new issue priced the week of 12/9/19

Prices, yield and availability subject to change