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Buying-opportunity ping.
What could the ebola scare do to the markets? Would metals or mining stocks be safer than consumer related stocks?
Of interest to investors who use an asset allocation strategy keyed to age and individual circumstances.
Amid Tumult, Bonds Prove Steady
OCT. 17, 2014
By JAMES B. STEWART
This week’s stock market drop and wild gyrations may have been wrenching for investors, but they can’t really be called a surprise. After 27 months with no significant decline and with many valuation measures signaling caution, a chorus of pundits has been predicting a stock market pullback and higher volatility.
But along with the turmoil, there was a surprise: On Wednesday, the yield on the 10-year United States Treasury note hit 1.85 percent, its lowest level since May 2013, extending a yearlong Treasury bond market rally that almost no one predicted.
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The recent volatility of stocks and the unpredictability of interest rates is a potent reminder to most investors to have a diversified mix of stocks and bonds and stick to a simple asset allocation plan. “What happened this week isn’t unusual, and it isn’t abnormal,” said Francis Kinniry, a principal in Vanguard’s investment strategy group. “Stocks are a high-risk, high-return asset.”
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Given recent strength in the United States economy, the decline in the unemployment rate and the Fed’s repeated intention to tighten monetary policy over the next year, no wonder hardly anyone anticipated this year’s bond market rally. But there were a few lonely voices. In his list of “15 Surprises for 2014,” issued in January, Douglas Kass, president of Seabreeze Partners Management (and a widely followed market pundit), predicted “slowing global growth” (surprise No. 1); “stock prices decline” (surprise No. 3); and “bonds outperform stocks” (surprise No. 4).
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Mr. Kass expects the bond rally to continue and is among those who suspect the Fed will delay raising rates. “People are losing sight of the fact that the Fed hasn’t raised rates since June 2006,” he said. “I don’t see them raising rates for two or three more years. That will be another surprise for the markets.”
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In keeping with its longstanding approach, Vanguard is urging investors to stick to a simple, low-cost asset allocation model divided between stocks and high-quality bonds and not try to time markets. “Many investors make the mistake of looking at bonds as stand-alone investments with low expected returns,” he said. “But they’re really there to complement the equity risk. We’ve looked at this in depth over long periods. And when equities are under stress, the only assets with positive returns have been very high-grade government bonds, high-quality municipals and high-grade corporate bonds. Everything else — hedge funds, private equity, real estate, high-yield bonds — has gone down.”
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