Understanding Risk

Stocks and Bonds in the New Year

As we start a new year, the universal view of market pundits is that bonds suck wind and stocks look okay.  This alone should make equity investors nervous and give some comfort to bondholders.  But expectations are modest:  the S&P 500 closed 2013 at 1848 and 2014 year-end targets from various investment banks range from 1850 to 2000, corresponding with returns of 0% to 8%. As we know from (sometimes bitter) experience–and extensive research–such predictions aren’t worth the paper they’re printed on, but can we say anything useful about risk? According to Sentiment Trader, which monitors investor sentiment, several stock […]

Should You Rebalance Today?

For much of the past year, I have argued in several blogs that bonds should be regarded as risky assets.  When ten-year Treasuries were yielding less than 2%, for example, I pointed out that this meant their prospective real return would almost certainly be negative.  On September 13, I warned about the potential for a liquidity crisis in the corporate bond market next time it encountered heavy selling pressure.  And “What Next?” posted on October 11, concluded that the various scenarios following Federal Reserve “tapering” of quantitative easing all favored the stock market over the bond market. With the year-to-date […]

What happens when the Fed tightens?

When the dust has settled from the budget and debt ceiling debacles, we’ll still be faced with the question of how the Fed is going to extricate itself from quantitative easing without inducing panic in financial markets. I suspect we’ll have some time to ponder this question, because the Fed was clearly spooked by the markets’ reaction to chairman Bernanke’s comment in May that it might start “tapering” its $85 billion-a-month bond purchases as soon as September.  Just the suggestion that it might begin to pull back caused rates to rise sharply, effectively tightening monetary policy overnight. But this experiment […]