Pushing on a String

by Paul J Nolte CFA
Financial Sense

To quote Buzz Lightyear, “QE to infinity and beyond!” Ok, Buzz really didn’t say anything about QE, however Ben’s comments last week regarding the beginning of a new QE program essentially said that easy monetary policy would be from now on, until such time, that the Fed believes it should be revoked. The open-ended nature of the QE lit a fire under commodity prices and stocks within the commodity sector. Treasury bonds took it on the chin as the Fed focus is now on mortgage backed securities.

While the expectation is that stocks will outperform bonds over the coming months, it just might be possible that bonds best stocks. When expectations are so high by so many, it makes sense to begin looking at the flipside of the argument to see if there are opportunities that no one is focused upon. Below is a chart showing the relative performance between stocks and bonds (SP500 v. Barclay’s Aggregate) over the past few years. A rising line is bonds besting stocks, falling means stocks beating bonds. Beginning with the peak in bonds vs. stocks (at the market bottom in March ’09) stocks have generally performed better than bonds. There have been relatively short periods of 3-6 months where bonds best stocks. These periods corresponded to additional financial crises, from the US downgrade to sovereign debt in Europe. What is evident from looking at the chart is that each subsequent “worry” about Europe is less stressful for investors, keeping investors buying stocks and avoiding the rush into bonds. The recent decision by the Fed to have QE “unlimited” is the last straw and investors stampeded into stocks after the announcement.

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