Some experts are saying it is impossible to be bearish with what is happening in the stock markets and what we are seeing with the bond yields. Is it a temporary phenomenon?
It is really hard to get bearish and the reason is that though the interest rates have gone up, it is very challenging when you have this level of yield on a 10-year treasury. But at the same time, we continue to get news in response to the $1.9-trillion in stimulus that we are about to get. Because of that and because of the good news on the pandemic in the US, there are continuous upward revisions to economic forecasts for 2021 and 2022, and especially the second and third quarters. We are also getting very tame inflation numbers.
When you continue to get an upward forecast for the economy and earnings, it is very hard to get bearish because the news keeps getting better and there is also the news on the pandemic. If you try to get bearish, you are stepping into a steady stream of good news and that is really not good for those that are short sellers or bearish. The only thing you can possibly say is that we have come very far very fast and right now we are probably a little bit pricey or overvalued. We are about 7% overvalued but believe me it is very hard to get bearish when the news is this good.
It is difficult to be bearish when the news is this good. Where is all the money going?
It just keeps going into the stock market and some of it is now finding its way to the bond market. Keep in mind though that some stability is starting to show up in yields and so long as the Federal Reserve promises to keep the federal funds anchored at zero debt, 25 bps, really 12.5 bps, it is hard to make the case. It is possible to make the case for a little bit of a move upward in yields on a 10-year treasury but not a lot further.
We have seen the yields on 10-year treasuries rise and that has shaken up the markets from time to time but I do not think it is going to see a much further rise. You cannot have that kind of a rise if the Federal Reserve or Federal Reserve policy remains anchored. We are looking at a continuous flow of good news and if you look at the earnings numbers, S&P 500 earnings were down 13% in 2020. We are going to be up about 22% in 2021 and we will have good numbers for 2022.
The news is continuously good and even though we are pricey and a little bit over-valued, it is hard to step out of the way. Now where do you put your money? I do not think you speculate in things like Bitcoin. I do not think you speculate at things like game stock. I know a lot of speculation is going on that is where a lot of the liquidity is going. Individuals are taking their stimulus checks and putting it into the game stocks and Bitcoin. We are not doing that. I am not doing that and I certainly would not have any of my clients doing this. So there is some speculation but it is not widespread speculation.
