“Why is it illogical?” you ask. Ultra-low rates have been working their magic for more than six years, pushing savers into higher-yielding, higher appreciating investments and prodding businesses to borrow “on the cheap” before buying back their own shares. Yet low rates can only take stocks so far. Consider a neighborhood where the comparable price for a home is $450,000. One is unlikely to pay $4 million for a similar property on the sole basis that mortgage rates are marginal. By the same token, there comes a point where stock assets are severely overpriced, so much so that no amount of Federal Reserve rate manipulation can justify ownership.
In truth, it is a positive sign that investors can look past the phenomena of the NASDAQ hitting 5000 here in March of 2015. Merely taking note of the fact that the same event transpired 15 years earlier shows guarded vigilance.
And there’s more. There are no rules about when an overvalued world of assets – stocks, bonds, real estate, etc. — will crack; overvalued conditions can persist for years. That’s why I employ stop-limit loss orders, multi-asset stock hedging and trendline breaches to minimize exposure to market-based securities.
Let me shift to bond ETFs to provide perspective. Anyone who has read my commentary over the last 15 months knows that my clients have benefited immensely from owning Vanguard Extended Duration Treasury (EDV). Moreover, in my estimation, the party for overvalued long-maturity treasuries is far from finished. Still, if EDV breaks below its 100-day and hits my pre-determined stop-limit loss order near 122, I will reduce some portfolio exposure. (Note: A key will be resistance in and around 124, as well as at 122.7 at the 100-day.)
Stocks do not appear ready for a tumble. Not without a shock to the system, whether it is an unexpected move by the Fed, an unnerving geopolitical occurrence, or a sharp pain from recessionary pressures. There is little evidence of an imminent economic contraction at this moment, though deceleration poses a unique threat at a time when the Federal Reserve has been discussing an overnight lending rate hike.
Consider the fact that the U.S. economy grew at its sub-par, six-year average of 2.2% in the final three months of 2014. Meanwhile, in the first three months of 2015, exports have been waning, consumer spending has been declining and manufacturing has fallen to 13-month lows. Expect first quarter economic activity to dip markedly below its six-year average. One might also anticipate that if chairperson Janet Yellen moves ahead with a rate hike in spite of signs of economic deceleration, stocks will stumble.
I am sticking with lower volatility stock ETFs – both stateside and abroad. My largest holdings are still Vanguard High Dividend Yield (VYM) and iShares USA Minimum Volatility (USMV). Moreover, to reduce the dramatic price swings associated with a number of unhedged foreign market stock ETFs, I prefer funds like WisdomTree Europe Hedged Equity (HEDJ).
