Investment Contrarians

Why This Market Is Reminiscent of 2000

By for Investment Contrarians |

Market ReminiscentThere is simply nowhere else to put your money to work, which is why the stock market continues to edge upward to new record highs.

You can earn a yield of 0.23% on a two-year U.S. Treasury, 0.79% for five years, 1.90% for 10 years, and up to 3.13% if you extend it to 30 years. (Source: “United States Government Bonds,” Bloomberg, May 17, 2013.)

Of course, unless you have tens of millions of dollars to invest, I highly doubt you, or anyone for that matter, would be happy with these petty returns on bonds.

You could always go out and buy Spanish 10-year bonds yielding 4.29% as of Friday. Heck, you can do this out of your own kindness and help Spain out of its financial crisis, with an unemployment rate at over 25% and massive debt loads that will hinder the country for decades.

Or you can simply invest in higher-yielding U.S. blue chip companies, such as General Electric Company (NYSE/GE), Johnson & Johnson (NYSE/JNJ), and The Procter & Gamble Company (NYSE/PG), which all offer dividend yields of more than three percent.

The reality is that investors have been rushing into the stock market and not wanting to miss out on the Wall Street party, which appears to be attracting many party goers.

JPMorgan Chase & Co. (NYSE/JPM) is the party organizer and the biggest bull on Wall Street after coming out with a year-end target of 1,715 for the S&P 500. Now with over seven months left in the year and with the index already at 1,660 as of last Friday, another 55 points in this frothy stock market really shouldn’t be that difficult to achieve.

My own target for the S&P 500 was around 1,650, which has already been surpassed. I’m not going to provide another target at this point, though, because I really don’t want to chase the market higher.

I recall back in 1999 when the stock market was going through the roof. Wall Street was one of the biggest cheerleaders back then, with some calling for the Dow to target 20,000.

Sounds a bit familiar, don’t you agree?

The reality is that the stock market continues to ignore the negative signs. In the past week, we saw some soft economic readings, including housing starts, manufacturing, and initial claims, but the stock market pushed aside the readings and edged up higher.

My feeling is that there’s some froth developing, as there appears to be very little connection between what the stock market is doing and what the economy is telling us.

Even suggestions from some Federal Reserve members and non-members regarding a potential exit plan for its bond buying failed to send sellers to the exits.

In fact, the easy money is flowing worldwide and driving up the stock market.

The European Central Bank cut its main refinancing rate to a record 0.5% and said it would continue to inject money into the monetary system for “quite a long time.” (Source: Melander, I., “ECB to keep monetary policy loose for as long as needed,” Reuters, May 17, 2013.)

In Japan, the country wants to triple its infrastructure exports and double its farm exports by 2020 through what are extremely aggressive plans by Prime Minister Shinzo Abe. (Source: Kaneko, K., “Japan PM sets targets in latest growth strategy tranche,” Reuters, May 17, 2013.)

The key for you is not to fight the trend, but to be wary of the advance in the stock market—and do yourself a favor by taking some money off the table.

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  • jack smith

    under employment from constant job cuts causes depressions. Keynesian economics says to stimulate the economy with monetary boosts as well as government infrastructure projects to get the money flowing in the economy… so far its only been monetary stimulus with the republicans rejecting public works and tax increases on the money hoarders! Keynesian economics were used to end the great depression and were widely supported until the 1970's hyper inflation hit when the use of it became taboo