The Dow is breaking out while the Nasdaq is breaking down. Rust-belt America Stocks are on fire, while Silicon Valley stocks are as cold as ice.
In addition to this, Stocks are flying while Bonds are sinking. Are you in the right neighborhoods of the market?
It is now a market of extremely sharp contrast. From my point of view, that is good thing. We finally have some clear direction after the election, where none existed before the election. It is a lot easier to navigate through a market where the compass is not changing direction daily.
In the months leading up to the election, we would have a big up day, followed by a big down day. This cycled repeated itself over and over and over again.
One day the FED was sure to hike interest rates and the next day it would seem unlikely. One day, Hillary Clinton was a sure thing to win the election, the next day she was not so sure. One day OPEC was going to cut production, and the next day they were back to squabbling again.
Then the dollar would soar and gold would sell-off. Then gold would soar while the dollar sold off. The peso would then fly along with the Latin American markets. Then the Latin American markets would sell off, along with the peso, as fear of a protectionist Trump would start to catch up in the polls.
It was a very frustrating environment for professional money managers like me, and for individual investors. We learned once again just how much the market dislikes uncertainty. The market does not like guess at monetary policy. The market does not like to guess at fiscal policy. Nor does the market not like knowing what kind of administration will take over on Inauguration day.
Well, all of that changed on November 8 th, when Donald Trump pulled off a stunning upset in the much anticipated General Election. Whether your guy won or not, the whole world of investing changed on November 9 th.
Nothing concrete really changed on that day, but expectations changed wildly. The market does trade on expectations, and when expectations change, you better go with the flow or you are likely to get run over by a steam roller.
No longer does the market expect the loosest monetary policy that we have ever seen. In fact, monetary policy alone was the main driver behind the meager growth that the economy was achieving. The economy was starting to gasp for air however, as it prepared for a round of rate hikes by FED.
The market had the worst January ever as it wondered where growth would come from without the loosest slots in town. The FED watched in horror at the beginning of the year as the U.S. market, emerging markets, and oil prices tanked.
The only choice that they had was to back off and do an about-face on the planned rate hikes. Here we are almost one year later and we have not yet had one of those threatened rate hikes.
But now there is a new sheriff in town, and the market expects the new regime to let the market set rates, not a hyper active FED. The bond market gets it and is selling off viciously while rate rise. I am afraid that most money managers and individual investors do not get it, however.
Their asset allocation portfolios have been slammed while the stock market has rallied to new all-time highs. Very few bond investors have ever seen a bear market in bonds. Rates have been going down, down, down since 1982!
How low can you go? I wrote about 5,000 year lows and the unprecedented risk in the bond market in my July 25 th newsletter and in a Seeking Alpha article. I almost caught the top of the bond market but not quite. I missed it by a few weeks.
On July 5 th I had warned about utilities and REITS. I pretty much nailed the top on that one. Here is one-year chart of the Vanguard REIT index ETF.
Here is a chart of the iShares U.S. Utilities ETF.
It looks to me like rates to have a lot of room to move higher and bonds have a lot of room to move lower. Rates are now finally beginning to normalize. What is normal? Over the long haul, rates have averaged somewhere north of 6%. We are currently at just 2.44%.
I think that there will be a lot of shocked investors when they open up their December, asset-allocation statements. Wall St. could not have gone towards a robotic, re-balancing system of investing at worse time.
The robots are busy buying sinking bonds and selling rising stocks currently. This is the exact opposite of what should be done, but a large chunk of investors have drank from the red kool-aid cup of asset allocation.
Asset allocation depends heavily on the bond market, especially as investors get older. This system does well in a falling interest rate environment, but not so well in a rising interest rate environment like we are now in.
I have written much in my recent newsletters about what does well in a rising interest rate environment. Here is just one such article. Those trends are now taking off. Assets that do well in a rising rate environment are now soaring, while those that don't are getting whacked.
This is also a terrible time to be a passive investor. This means keeping your head buried in the sand while the whole world is changing around you. While your bonds are sinking, the market is hitting new highs. If rates continue to rise, bonds will continue to sink. It is as simple as that.
I may sound like a radical, but I have NO exposure to the bond market. I also have no exposure to REITs or Utilities as they are extremely interest rate sensitive. They still look like very poor choice to me.
Now we are witnessing an extremely sharp contrast between the Dow Jones Industrial Average and the Nasdaq. Just look at Wednesday and Friday's action. The Dow is hitting new highs while the Nasdaq is getting slayed.
You can see the headline of this article from Thursday's action in the market. The Dow was up 68 points while the Nasdaq was down 84 points! This is a huge differential. There are several reasons for this huge discrepancy.
As I wrote in my newsletter and article last week, this is now a market that favors VALUE stocks over GROWTH stocks.
The traditional value sectors, for the most part, like a rising interest rate environment. We are now seeing new leading sectors emerge in this market. They are very simple, basic companies from middle-America. They are not high-flying sectors from the left and right coasts.
The yield curve is now steepening. This is great news for the banks and financials. They are blasting off.
Infrastructure and jobs is also a big expectation from the new administration. That is why basic building and building material stocks are now in favor, while social media stocks are falling out of favor.
Another reason for the sell-off in the tech stocks is that there is a massive bout of sector rotation currently taking place in the market. It is downright vicious. The tech stocks are being used as a source of funds to buy into the new emerging sectors.
I wrote about this in my article two weeks ago. I also believe that the tech stocks are selling off because of a new, protect American jobs attitude from the current administration. The tech companies have had an almost unlimited source of foreign workers in the past. It is perceived that the new administration will not dole out green cards as freely as in the past. This could have a major impact the bottom line of tech stocks as labor costs rise.
This is now definitely a market that is rewarding investors that are on the right side of the street and punishing investors that are on the wrong side of the street.
It is up to you as to which side that you want to be on. As for me, I prefer the sunny side of the street.
Disclosure: I am/we are long KBE, IYG.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.