Friday, July 29, 2016

The Summer 2016 Outlook

Let's review the current situation.
  • The stock market indices are at, or near, all-time highs.
  • Interest rates are near zero.  They've never been this low.
  • Housing prices have recovered from the 2008 slump and are making new highs.
  • Unemployment is low and GDP is growing, albeit slowly.
It hardly makes sense to buy bonds, except maybe short-term bonds.  They pay little interest.  The market doesn't think interest rates will rise anytime soon, but if rates rise, bonds will drop.  Interest rates can hardly go lower, so the risk is all one-way. Keynes showed, in his General Theory, that interest rates do not have a natural rate that they return to.  Instead, interest rates can stay low (or high) indefinitely.

As to stocks, they're not cheap.  The S&P 500 price to earnings ratio is about 25, on the high end historically.  So one would tend to think the top is near and that it's not a good time to buy.

As to housing, it's high-priced, as I'm sure you know.  The very low interest rates of recent years have allowed buyers to pay more, as their mortgage payments are lower than they would be if interest rates were higher.  I also think housing prices have gone up because there is so much immigration - these folks have to live somewhere.

Scenario One:  Interest rates stay low.  Bonds hold steady, stock market ditto, maybe grows a little.  Housing must surely be reaching a top.  If immigration is curbed, it could go down.

Scenario Two: Interest rates rise.  Bonds crash, stock market crashes, housing slumps. Banks need rescuing.

So not a good outlook.  Be cautious.  On the plus side, technology is changing the world.  Today, the top five stocks by market cap were Alphabet (Google), Amazon, Apple, Facebook and Microsoft.  You need to have positions in these or risk getting left behind.