Now that I'm on top, everyone wants to bring me down. Everyone's trying to tug at me and take my spot.
-- Justin Bieber
According to Urban Dictionary, a Belieber is "a person who loves Justin Bieber and beliebes in everything that he can do." Throngs of adoring fans turn out to see his concerts, hanging on every word and lyric for the thrill of it all. In some ways, financial markets are Beliebers, too, with every media outlet in the world, every trader, and every investors moving money based on Ben Bernanke's words. Granted Bernanke's adoring fans are more likely to be older men than teenagers, but the response is the same. Bernanke wants us to beliebe in him and in the idea that the Fed can win the fight against deflation by causing inflation in asset values, increasing the wealth effect, and forcing the economy into escape velocity.
But there is a problem with that. The "Great Rotation" isn't exactly panning out, despite the unrelenting rise in US stocks. Baby boomers who are nearing retirement are largely underinvested in equities thanks to the shock of 2008, and many seem to have underestimated how much money is ultimately needed to live beyond peak earnings years. Bonds have done well for some time, but recent losses in fixed income do not seem to be causing a re-allocation into stocks. The largest ever monthly outflow in bonds seems to be flowing into money market funds according to recent ICI data – hardly something Bernanke wants his Beliebers to do, as it dampens the wealth effect that comes from rising asset values.
While I do beliebe in a coming re-allocation out of bonds into stocks as a longer-term theme, I wonder if what is happening now in markets may actually delay that, especially if stocks are about to fall here in the US. Once bitten, twice shy has consistently been in the back of most retail investors' minds for some time. With everyone now realizing just how handily the S&P 500
(INDEXSP:.INX) has outperformed, the pressure is on for most asset allocators to buy US stocks. After all, the Bernanke put supposedly makes it impossible for equities to decline, or so we beliebe.
Yet intermarket trends are sending some warnings for US averages. Take a look below at the price ratio of Wal-Mart
(NYSE:WMT) relative to the SPDR S&P 500 ETF
(NYSEARCA:SPY). As a reminder, a rising price ratio means the numerator/WMT is outperforming (up more/down less) the denominator/SPY.
Wal-Mart is the classic deflation/recession play, given that relative to other retailers and the overall market, the stock tends to outperform and the company tends to be the biggest beneficiary of a scaling back consumer. Note that the ratio has stabilized over the last two months, and may be on the verge of outperforming with a rising price ratio. If all is well in the economy, and reflation is here, then why would Wal-Mart be holding up so well? If we are to beliebe Bernanke about low inflation being transitory, then why isn't Wal-Mart underperforming?
The bottom line? Good times, and good feelings, are all thanks to Bernanke changing his tune on tapering. But sophomore slumps have a funny way of disappointing...
No positions in stocks mentioned.
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