First Bonds, Now Stocks

The bond market has performed well of late and municipal bonds added to their top ranked performance last year. Yields seem to move in only one direction, down, making prices appear to only go up.

Around the world bond prices have gone up so much, yields on trillions of dollars of bonds are now negative. The trend in bond prices has continued for so long (thirty-plus years) and has produced seemingly consistent returns for so long, investors seem loath to do anything except buy more.

Whatever the reason, whatever the narrative, almost all pundits are on the same side of the boat: low yields and high prices will continue. Money managers may be buying high priced negative yielding bonds now because they are judged on their current performance, not the negative performance calculated if they hold the bonds to maturity in five, ten or more years. Good performance seems to beget good performance, so enjoy the ride!

If you liked the bond market rally this year then I think you will really enjoy the stock market rally which appears to be gathering steam. Stocks rebounded from their early season low in February and new all-time highs are being set regularly of late. Like bonds, as the rally continues to gather momentum, expect stocks to generate excitement, the excitement previously held for bonds.

I expect the narrative for continuously rising stock prices to mirror the narrative for ever-rising bond prices. Whether the narrative centers around central bank (Federal Reserve) intervention, squeezing yields ever lower for longer, lack of inflation, or something else, I do not know or care. The narrative is not important. What is important is that these bond and stock price highs are for me, the end of something and, more importantly, the extreme end of something.

Bond and stock prices have been high before, but never this high. To make money buying high priced (negative yield to maturity bonds), one must sell your bond for a higher price than you paid. In other words, one must find a greater fool.

Long the domain of stocks and other investment manias (tulips, art, prime real estate), the greater fool theory is working its magic in the bond market. Investors continue to buy bonds in which the only way out with a positive return is to sell before a maturity date that locks you into an-all-but-certain loss.

Thankfully we have alternatives and thankfully we are utilizing them. Rather than hoping or praying to find a greater fool at just the right time one chooses to sell, I would rather take an approach which has proven to be worthwhile over shorter and longer-term time horizons.

All-time highs are exactly what they say they are. They are never, by definition a great time to buy; they are often-times great times to sell. Investing is still a risk/reward game and with little reward seemingly available, the risks appear to me to be even greater.

We may have witnessed the final rally in the thirty-plus years of bond market rallies. It was an all-time high for ten year and thirty year U.S. Treasury bond prices as well as other long-term bond prices such as municipals. Over the coming months we will begin to see whether the top is indeed in.

Similarly for stocks. They appear to have legs to go higher still and I would not be surprised. Like bonds before them, stocks are slowly moving everyone to the same side of the boat. If prices do go higher, expect everyone to appear to be more certain the move will continue.

If this happens over the coming weeks, just remember it would be the end of something, probably the extreme end of something.