6/27/13 1:42 PM – Markets Continue To Bounce Back

Stocks are up again today, the 3rd day in a row after US stocks they fell roughly 5% in response to the Fed announcement last week. So far they have gained back half of the drop.

Bonds are also up again today, though their selloff began in late April. They had also dropped about 5%. Of course, it varies quite a bit by type of bond, just as when I say the stock market moves a certain amount, I am talking about a broad index.

A sharp drop in bonds has been rare the last 30+ years and since everyone has been waiting for the drop in bond prices for a year or two, bonds are the more noteworthy of the two drops. And, a 5% drop in a few weeks is huge when it comes to bonds.

The thing about the Fed minutes is that they didn’t really say anything except restate what Ben Bernanke has been saying – that a tapering off of the Fed’s bond buying program would be contingent upon continued good economic reports and that they would keep interest rates low probably until 2015. Now, while I think the Fed has been consistently overly optimistic about economic forecasts the idea of starting to taper off in maybe six months shouldn’t have been big news.

I think the markets often sell off for reasons not highly related to the news that supposedly moved them. When markets get extended, anything will do for a reason to do some selling, profit-taking, and closing out of options and futures positions. What could be more extended than the treasury bond market and the junk bond market?

It is very hard to predict future stock movements. I learned a long time ago that trying to time the market based on expectations is a loser’s game. Even extremes that you know will get reversed at some point seem to defy any expectation when it comes to knowing when.

That said, I expect corporate profits to be fairly flat the remainder of this year and next. I prefer to be in lower-risk stocks and as you know, have recommended ditching traditional bond funds for ones that do well in a rising interest rate environment.