Bill Gross, Pimco's bond guru and Wall Street Bond King, shocked the investing world on April 29 when he announced that "The secular 30-yr bull market in bonds is over." This statement was a catalyst for the biggest monthly loss in fixed-income securities since 2004. In May alone, all forms of bonds fell off a cliff and many treasury ETFs and funds lost 7%, while corporates and high yields lost 15-20%. Even TIPS (Treasury Inflation Protected Securities) (TIP) got hammered, and they are designed to go when rates rise.
This volatility is a warning sign to get out of bonds, and I am taking this warning to heart and selling corporates at this time. It may be premature, but I'd rather be early than late. My concern at this point is only for corporate bonds, which will be hurt from a slowing economy. I continue to believe good opportunities still exist in other fixed income areas that can invest globally.
The primary culprit of the May bond sell-off were statements made by the Federal Reserve policy makers that they could slow the pace of the stimulus programs sometime soon through their $85 billion a month in debt purchases. A.k.a. Quantitative Easing [QE]. It was Ben Bernanke's comment:
If we see continued improvement and we have confidence that it is going to be sustained, then we could, in the next few meetings, take a step down in our pace of purchases
that sent shivers through the spines of investors.
The Fed quitting its stimulus programs might be feasible if the economy were truly on a massive recovery and inflation were rising. However, tame inflation and lower global growth estimates from the International Monetary Fund indicate the world's central banks won't pull back anytime soon. Once investors start to feel more confident that the Fed will keep the bond buying programs, both the stock and the markets will stabilize. This is likely just the much needed correction and not the end of the rally just yet.
Granted, the U.S. economy has definitely shown signs of improvement, but we are a long way from being ready to get off the Fed's life support. Clearly all of the global stimulus measures cannot overcome the massive demographic headwind of aging populations faced by the entire developed world, which I explain in Facing Goliath - How to Triumph in the Dangerous Market Ahead.
I do not fear the end of Quantitative Easing for the market quite yet, but we all must stand ready to act for not if, but when, this day comes. With U.S. and global demand waning, and deflation more likely than inflation, money will come back to risk assets. This will continue to be the most unloved rally in history, at least for a while. When we start to see increasing investor pessimism turn to optimism, that will be the signal to run for the hills.
At the moment, far too many are underinvested and feeling beaten up by the bond market. This will help move money away from bonds to equities.
Regardless of the pervasive fear that the Fed will stop its stimulus program, investors should use any weakness to buy equities particularly in high technology where innovative business and personal solutions will lead the future. Buy Apple (AAPL), which is coming out with new products this summer and is sure to be revolutionary: Google (GOOG) which has a new "Glass" product that will revolutionize the communications market, and the periphery companies that support these new innovative developments such as Intel Corporation (INTC), Qualcomm (QCOM), Microsoft (MSFT), Cisco Systems (CSCO) and VMware Inc. (VMW). For a more diversified approach, buy the broad market ETFs like the SPDR S&P 500 (SPY), PowerShares QQQ Trust Series 1 (QQQ) and iShares Russell 2000 (IWM).