December 26, 2016

Since Donald Trump was elected, a few noteworthy things have happened.

For instance, the correlation between stocks and bonds is near zero. It’s almost always strongly positive or negative. When the correlation is strong, investors lose diversification. When stocks and bonds are negatively correlated (as they are now), bond yields tend to shoot up.

This chart from the Wall Street Journal the rarity of the situation:

As I wrote at the beginning of 2016, low rates are forcing investors to either save more for longer or assume more risk. In the 1990′s you could expect a 6 percent return in a money market account. And with some risk, 8-10 percent returns on corporate bonds weren’t out of the norm.

Not anymore. Today, those in and near retirement are piling into stocks because low-rate policies have killed those 90′s returns. I’d suggest they shouldn’t be so heavily invested in stocks at that stage of retirement. The counterpoint is they’re in “safe” stocks like AT&T, Phillip Morris and so on. Well Phillip Morris’ P/E ratio is hovering in the 20′s, which I wouldn’t consider safe.

But that’s today’s market – historically “safe” stocks are trading at 20-30x multipliers, when they should probably be in the mid-single digits. On top of that, insiders transactions are down. Are executives’ own stocks unattractive? It seems so. Out on main street, auto sales are down, which often happens before a recession.

More Wall Street Journal charts illustrate the point:

Unfortunately, there are many indicators out there pointing to us being worse off. And I don’t mean to end the year on a down note, but several analysts are expecting a recession next year.

I’m hopeful for the best, but preparing for less fortunate outcomes.