The financial markets tipped a little off their rocker Thursday. Stocks soared, with the Dow gaining 206 points to a new post-2007 high. Gold and silver zoomed. Treasury bonds initially plunged, but then recovered most of their losses.
Why all this sound and fury? Why, of course: “Helicopter Ben” Bernanke announced another money-printing (ahem, “quantitative easing”) program. Under QE3, the Federal Reserve will buy $40 billion dollars worth of mortgage securities each month, indefinitely.
The nation’s central bank also pledged to keep interest rates low “at least through mid-2015.”
It’s hard to know, at this point, who is more insane—Bernanke for debauching the dollar like this, or investors for believing (after four years of contrary evidence) that Bernanke’s policies will actually bring prosperity. Nonetheless, the bloodless verdict of the market, as of today, says everything’s hunky-dory. Party on!
Of course, anybody who has looked behind the curtain knows there’s plenty amiss. According to Thomson Reuters, companies in the S&P 500 index are likely to report their lowest year-to-year sales growth for Q3 of any quarter of the past decade (the 2008-2009 crisis excepted).
Furthermore, S&P earnings per share are projected to drop 2% from a year ago, the first such decline since the third quarter of 2009, just after the recession ended. Corporate performance metrics have weakened dramatically this year, and may weaken further as we approach the year-end “fiscal cliff.”
Yet the S&P has jumped 16.1% year to date. Reminds me of early 2000, when the NASDAQ kept surging even though one Internet company after another was reporting massive, balance-sheet-wrecking losses. Markets can, and do, temporarily take leave of their senses.
What to do when that happens? Just relax and enjoy the show. Sooner or later, roman candles shot into the air always fall back to earth. We’ll again be active buyers of stocks and equity mutual funds when prices come down, as they surely will in due time (perhaps with a thud).
Meanwhile, the advice I gave you in the September newsletter (p. 5) to buy long-dated Treasury bonds was triggered today. As of Wednesday’s close, the 200-day moving average for iShares Barclays 20+ Year Treasury Bond Fund (NYSE:TLT) stood at $120.91.
Accordingly, we’ll assume, for the model portfolio, that you bought TLT at $120.91 today. The fund closed at $121.53.
For future purchases, we’ll use $121 (a clean, round figure) as our buy limit.
We also bought TLT for our Hassle-Free ETF Portfolio. In the Fund Supermarket Portfolio, we bought Wasatch-Hoisington U.S. Treasury Fund (MUTF:WHOSX).
For our All in the Family fund portfolios, we bought the appropriate Fidelity, T. Rowe Price (NASDAQ:TROW) and Vanguard Treasury funds, all in accordance with the instructions laid out in the September issue.
P.S. While I’m delighted to see our precious metals and mining stocks swept up in the buying spree, I’m also cautious. Bernanke (and Draghi, in Europe) may have merely postponed what could turn out to be a vicious global cycle of debt deflation in 2013. Check out Nouriel Roubini’s warning in this regard. It’s OK to hold your existing stake in the metals sector, but don’t add.