Dancing About The Yield Curve

It is one of the greatest aspects of capital markets. Investing is just as much an art as it is a science. And unlike many of the arts that can be discussed in terms of ordinary life experiences, investing along with the economics and finance that are underlying it are often complex, multi-dimensional across space and time, sometimes nebulous and very much subject to the interpretation of each individual participant in the market place.  So despite being a science grounded in the historically quantitative and definitive that have has taken place in the past and present, investing is just as much if not more so an art in interpreting this music from the past in singing about the future.

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The Higher They Climb, The Harder They Fall

It is a remark that I often see when assessing the upside and downside probabilities of various capital market outcomes at any given point in time.

“How can you maintain your bearish view about U.S. stocks when they have performed so well for so long?”

The question certainly makes sense. Given that the stock market continues to go higher and higher, how in my right mind can I maintain the view that the stock market might go down in a meaningful way at some point in the future? But from my perspective, the fact that this very question is being asked provides insight into why stock investors are so renowned for “buying high and selling low”.

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The Bull Market Is Over

Remember all of the declarations at the end of last year?

“The bond bull market is over!”

Turns out, not so much. Despite all of the flippant declarations including from some of the most esteemed participants in the investment world, the 36-year bond bull market remains not only alive and well nearly a year later, it appears poised to make its next move to the upside. The lesson? Be careful when declaring the end of a sustained bull market in bonds or any asset class for that matter, including stocks.

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The Peril Of Willful Ignorance

It has been said that the stock market can go down and relationships can come to an end. But following more than eight years of a seemingly relentless stocks market rise through any and all challenges thrown in its way, it is understandable that many investors simply do not believe it can happen anymore. Indeed, stocks and investors have seemed such a delightful couple for so long. And despite repeatedly hearing words to the contrary from so called market “experts” along the way, what at this point could really happen to change this beautiful relationship?

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Diversification For The Long Run

Investors of all ages should own stocks for the long run. But they should not do so in entirety. Instead, they are much better served from both a return and risk perspective by allocating to stocks for the long run as part of a diversified asset allocation strategy that also includes a variety of other asset classes.

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