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GDP came out much higher than expected this morning causing a rally at the open that has since retraced. We didn’t think this number really meant much and the market seems to agree. That being said, it is a bit troubling to see the rally retrace so quickly.
Performance gaming is usually present around month ends so we would expect a rally today, tomorrow, or Friday.
There are still some troubling divergences in Small and Large Caps but ETF flows show extremely high demand for small cap ETFs over the past couple of days so perhaps that will work its way out.
We still have a target of 2030 for the S&P 500 by year end.
Bubble in Stocks and Bonds?
Forming bubbles in asset classes is part of human psychology—greed, fear, and ignorance. 2002 was the result of bubbles in stocks and 2008 was the result of a stock market and a real estate market bubble. In each instance investors could have found safety in bonds. The next bubble is looking to be even more insidious because there could be a bubble formed(ing) in stocks and bonds at the same time.
According to a report in the Telegraph, on the bond side we are seeing historic lows in yields across the board. German Bund yields are at all time lows, Netherlands bond yields are at 500 year lows, Spain is at two century lows, France is at 250 year lows, and Italy is at lows not seen since 1945. US Treasuries don’t yield much either.
On the stock side the market continues to advance, consumer confidence spiked to the highest it has been since February 2011, according to the Street.com margin debt is near all time highs, and according to Streettalk.com corporate leverage is at all time highs. However, the latest AAII survey and the put/call ratio do show that investors have turned cautious.
For tactical investors this is nothing to worry about, bubbles are natural and will continue to form and burst across asset classes. Tactical investors can take advantage of the upside and shift to avoid most of the downside. Buy and hold investors don’t have that luxury unfortunately.