Calling “tops” in markets is an impossible thing to do. Some get lucky but most of the market participants looking for the “top” tend to be early. Having that out of the way, we may be nearing a top regarding the hubris surrounding the turn-around we have witnessed in the broad swath of asset
prices since the 2009 lows.
Marching on through Q1 earnings and enter the second quarter we have to begin dealing with the elephant in the room which is the Federal Reserve’s interaction with financial markets. Should the FED maintain their taper at a rate of $10 billion per month (currently $45 billion) by September they will be out of what has become a 3-part Quantitative Easing program originally announced in December of 2008 and initiated upon in Q1 2009. Provided this expectation becomes a reality, come Q1 2015, we may see a Fed Funds rate increase of ¼ percent.
As the FED continues to taper, Goldman Sachs highlights their Global Leading Indicator which shows markets to be in an,“expansion phase”. In the GLI note,,Goldman analysts write “…given that the roll-off of weather-related distortions to US data may have a visible impact on data in the near term, we will wait for,the Final release with the full set of components for further confirmation that,the global cycle continues to turn”.
So where does this put us? The FED is tapering into what Goldman sees as an expansion phase that has “room for further acceleration from here”, which is most ikely the ideal time because the impact of the removal of the FED as a buyer in the Treasury and MBS market should be limited.
Now, here we are at what is probably the final push (or “acceleration” according to Goldman) and the FED is slowly becming less involved which means that come October (though I’d bet sooner, let’s say uly/August) bond yields will rise further as the Yield Curve continues to become more “normal”.
US Treasury Yield Curve (Current, 6-months ago, 12-months ago):
Once we move into a phase that will seem like normal after what has happened since 2009, there is a case to be made for the FED to raise the Fed Funds rate by ¼ percent which will most likely spark dormant orrowers to get loans before money begins to cost more though that rate increase may throw some cooling water on the hot housing market. Housing has seen a slight up-tick in New Single Family Home Sales since the 2009-2010 low reading while Median Sale Prices of Houses Sold has come from losing 10% per year in the late stages of the recession in 2008 to gaining 15% per year in 2013 to gaining 6% per year currently. Zack’s Research Group expects housing prices to continue to climb through the coming rate increases though they do remain skeptical that a housing slow-down could dampen the market’s bull run.
I will not call the current state we are in “the top” but I do have a heightened sense of alertness to what may be in store should the hubris of the current market run fail to permeate into forecasts and expectation announcements over the coming months. The ramp-up in Median Sale Prices since their recent lows has been driven mostly through firms like Toll Brothers buying up land to build apartment buildings (as renting has become more popular), condominiums, and senior housing complexes. This became a popular move by many firms flush with capital seeking to take advantage of local governments who discussed capping property taxes and reassessing property values as a means to capture the “paid-in-cash” high-end individual buyers once properties reset to the newly inflated prices (green line in the chart above) thanks to low interest rates driven by the FED QE program.
We need to be alert and beware of the herd behavior that is so prevalent in financial markets. Keen participants will be ahead of the curve as they anticipate and adapt before the rest of the markets catch wind of what’s happening. Though early movers may be mocked, allow me to offer some peace of mind with a quote from James Grant of Grant’s Interest Rate Observer fame:
Successful investing is about having people agree with you…later.