How do stock market benchmarks pop 1% out of the blue? Check your Twitter (TWTR) news feed. Crimea voted to join Russia as everyone anticipated. Industrial production rose more than expected in February. And the second largest e-commerce site in the world, China-based Alibaba, is getting increasingly close to an IPO date. In essence, buying the previous week’s pullback seems reasonable to the masses.
On the other hand, broader stock benchmarks have not made much progress in 2014 and the rallies have occurred on remarkably low volume. In contrast, long-dated Treasuries and precious metals have been runaway underdog success stories. Can the SPDR Gold Trust (GLD) and/or the iShares 20+ Treasury Fund (TLT) continue to defy critics? Perhaps. After all, few predicted the surprising season for the NCAA Tournament-bound Shockers from Wichita State.
Gurus assured investors that rising interest rates were a huge risk this year. They’ve been wrong so far. Similarly, prominent commentators laughed at the idea that gold would go anywhere but south of the $1,000 per ounce level. Wrong again. Meanwhile, stocks were supposed to be the smartest asset class for the money.
There are several problems with the simplistic assessments on the asset classes. For one thing, they ignored the benefit of diversification; in most years, diversification is valuable to a portfolio.
Additionally, safe haven seeking tends to increase when a single asset class stretches the boundaries of reasonable risk. Consider what the folks at Goldman Sachs (GS) are saying. Not only do they acknowledge that stocks are expensive across nearly all of their valuation metrics, but some of those metrics are downright scary.
Specifically, the median stock in the S&P 500 trades at roughly 16.7 times forward earnings — guidance that most expect will be lowered even further in the coming months. The median stock in the S&P 500 has traded higher than 16.7 less than 10% of the time since 1976.
These observations are not meant to suggest that a crash is imminent; rather, it is important to be realistic about the current environment.
In fact, one might even use the current circumstances to his/her advantage by considering big time trends that may be highlighting the strongest risk-reward opportunities.