By Alan Steel
On the back of yesterday’s (15 March) US Federal Reserve rate rise to 1%, Dr Ed Yardeni nets out the story of investor money movement when he writes:
“The bottom line is that the current bull market has been driven largely by corporations buying back their shares, as I have been observing for many years. More recently, we have been seeing individual investors increasingly moving out of equity mutual funds and into equity ETFs.”
Dr Ed continues: “We may be witnessing the beginning of an ETF-led melt-up, which may simply reflect individual investors pouring money into passive stock index funds. Lots of them seem to be more interested in seeking out low-cost funds rather than cheap stocks.”
And that last bit is an issue to keep in mind – corporates are focused on the long-term for increasing stock values in the current low borrowing cost environment, individuals are more focused on the short-term and reducing upfront costs than considering the long-term outlook and compound interest potential. In fact, that’s been a key storyline for the last eight years of this secular bull, from the period of stock market recovery (March 2009 to late 2013) and onto the new equity bull market of the past 3 ½ years.
The fear is real out there. And while I’ve yet to see this week’s American Association of Individual Investor (AAII) sentiment barometer, if last week’s is anything to go by then the herd is likely to still be on the run.
“We may be witnessing the beginning of an ETF-led melt-up, which may simply reflect individual investors pouring money into passive stock index funds. Lots of them seem to be more interested in seeking out low-cost funds rather than cheap stocks.”
Our good friend Mike Williams writes: “The 2008/09 period was ugly. Fear skyrocketed; lines formed at banks and waves of capital exited stocks and flooded bonds. In short, there was such a high demand for cash that the US Federal Reserve was forced to act by cutting rates.
“Fast forward eight years (and 14,000 Dow Jones points later) and that pile of cash sitting in bank accounts tops $9 trillion – wasting away at nearly the lowest interest rates in history. In that time – then to now – we’ve bounced from the Devil’s Doorstep (666 on the intra-day S&P 500 low) to new all-time highs.
“But investor sentiment hasn’t really changed. Sure, we’ve seen a slight awakening in bullishness of late, but as I’ve written repeatedly over the last few years, ‘Just give us a couple weeks of red ink and I will show you a crowd as afraid as they were in March 2009.'”
Alan here – And here’s a bit more perspective for you: So the US Fed just raised its benchmark target rate to 1 per cent this week.
Back in the early 1980s it was 20 per cent! And that happened to be the start of the longest secular bull market in history (1982 to 2000).
A good way to look higher interest rate movements is as a by-product of a stronger economy and stronger demand. Scott Grannis at the Calafia Beach Pundit chartifies this point here.
And always keep your long-term objectives front-of-mind. That’s where the value is, and it helps to keep the daily noise out.
Because after all, it’s your money.