INSIDE THIS EDITION:
Records are Everywhere, What Investors Should Do About It
As we approach the end of February, we are at a time for records. In Texas, low temperatures and in markets and the economy, both record highs and record lows. In this week’s commentary, we will review some of the records we are observing in markets and the economy and more importantly, what possible opportunities this may bring about for investors.
Domestic Stocks are at an all-time high
We have seen equities defy the odds and outperform expectations during the COVID-19 era. Of course, this has been aided by central bank support, federal stimulus, and unprecedented liquidity but does not take away the fact that domestic stocks continue to defy gravity, especially in some sectors. As a result, even broad indices like the S&P 500 and the Dow Jones Industrial Average are at a record.
Home Prices at an all-time high
It is no secret that many real estate buyers across the country have flocked to the suburbs over the last year as they flee congested city centers across the country. This trend has been reinforced by two developments with strong pull – COVID-19 and to a further extent, work from home policies.
Mortgage Rates are at an all-time low
With sales prices on homes near a record according to the S&P CoreLogic Case-Shiller Home Prices Index, we can look to the mortgage market for clues that have further boosted home prices. In short, the increased price level on homes has been supported by mortgage rates at an all-time low, thereby adding fuel to the home buying frenzy we are seeing across the country.
Corporate Bond Yields are at an all-time low
We have discussed record low yields for quite some time in this era of financial repression. With the Fed in no rush to raise interest rates and demographic trends helping further suppress corporate bond yields, investors should consider how long yields will remain near these records. The upshot is that with corporate bond yields this low, corporations are able to borrow at attractive rates.
Inflation expectations are also at an 8-year high
This is no surprise to any investors watching the Fed and the metals markets. The Fed last year came out and said they would use a new inflation framework that would allow for inflation to run hot. As a result, commodities, including metals have caught a bid. Whether it is Gold, Silver, or Copper each is at a recent high or close to one. Whether higher inflation materializes remains to be seen, however, investors should be paying attention as higher inflation can erode purchasing power.
Bitcoin is also at an all-time high
It is no secret that Bitcoin has gotten the attention of investors as a new and exciting investment vehicle. However, there remains debate about whether it will become a lasting technology and asset class. Truthfully, we do not know yet as regulation will drive how the story unfolds. However, what we do know is that despite questions about its viability, and persisting regulatory headwinds around the globe, bitcoin prices have managed to rise to a new record, now sitting at just over $56,000 per coin. This speaks to the appetite investors have today for three things – risk, speculation, and technology.
All these record highs and lows have understandably led investors to wonder whether there is an asset bubble in the US. For those investors, the question becomes where they should look to find opportunities. We think the answer may land in the hands of emerging markets. This is especially true if we consider that on the heels of the last crisis, it was the MSCI Emerging Markets Index that outperformed the S&P 500 for several years.
Although the MSCI Emerging Markets Index is heavily exposed to Asian equities and is overbought now, the index could provide opportunities to add on pullbacks that could pay off in the next few years especially if they repeat their performance of 2008-2010 following the last crisis.
Weekly Global Asset Class Performance Table
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