Friends
The Santa Claus rally has been in full force thus far in December, but it looks like Santa may be running out of presents. In a word, the market looks a little tired. Overbought? Definitely. Extended? For sure. But stocks seem to be the recipient of money flows right now, which has not been the case for a couple of years. As the bond market continues to break down (rates rising), investor dollars seem to be finding their way into stocks. Folks, this could be a trend that is just beginning, as individuals have been hiding out in bonds and bond funds for some time now. When investors who are predominantly invested in bonds get their December statements, they may be somewhat surprised. Yes, Virginia bond prices can go down.
We have seen the yield on the 10 year U. S. Treasury note rise from under 2.50% to over 3.50%. That represents about an 8% drop in price of the note in question. Other types of bonds have seen similar moves (municipal bonds, for instance), so those living out on the long end of the yield curve are in for a bit of a shock. Is this temporary, or is this just the beginning of a major new cycle? Remember, bond yields have been falling (prices rising) for 30 years. That is one long trend. If this is the beginning of the unwinding of that trend then we are in for a very different fixed income world. On the other hand, if the economy slips right back into slowdown mode in 2011, we may see that long-term trend resume and rates fall once again. We will discuss this more in our 1st quarter 2011 outlook that will be in your January Summary Statements.
As for stocks, we have had an impressive December to this point with the S&P 500 rising from 1180 to around 1240 is just a few weeks’ time. If we can hold above the 1230 level, the market may be emboldened to take a shot at the 1250 level by year-end. With the tax bill now behind us, the news cycle might slow down as we near year-end, so dramatic moves from here on out would be surprising. In our 1st quarter report, we will discuss in more detail our outlook for stocks in 2011, but for now we will hit one note of caution. Many Wall Street strategists have become extremely bullish (calling for higher stock prices) as they make their predictions for the new year. The market has been defined by climbing the “wall of worry”, and we become somewhat nervous when that wall seems to have been scaled. The money flow story is good for stocks, but the increasing enthusiasm makes us nervous.
I want to take a moment to wish everyone a very Merry Christmas. I will be out of the office most of next week, but the rest of the gang will be here if you need anything. As most of you know, I head back to St. Louis to spend time with my family (I’ll be spoiling my 3-year-old granddaughter) at Christmas time.
Hopefully, we will see you at the Open House today. If not, let me wish you all a very Merry Christmas from all of us a CHJ.
