Stocks are up, but they may have room to rally further, at least if you believe a popular gauge of their value. Companies are selling more bonds than ever, but not so much to send prices tumbling and end their remarkable run.
Even indebted Europe is offering investors big profits lately. Stocks are at eight-month highs in Germany and France and are up 12.4 per cent this year in Greece, of all places.
Credit a delicate balance when the economy is neither too hot nor too cold. Prices of myriad assets that might otherwise be moving in opposite directions are nearly all moving up. People are upbeat," says Martin Fridson, global credit strategist at BNP Paribas Investment Partners. "The glass is half-full."
For investors who own stocks and bonds, half-full is exactly what they need. If the economy were roaring ahead, stocks might rise, but maybe not bonds. Fear of inflation in a hot economy can lead investors to sell bonds and push prices down fast.
Not this year, though.
The Dow Jones industrial average is up 8.3 per cent this year. Bonds of various kinds are rallying, too — municipals issued by cities and states, junk bonds from the riskiest of companies, and even that once most hated and destructive of Wall Street products, mortgage-backed securities. They've eked out a 0.36 per cent gain so far this year, according to Barclays Capital.
The 10-year helps set rates for everything from mortgages to credit cards to auto loans, and a rise can sometimes scare investors into selling bonds issued by companies.
But in a land where the porridge is at the perfect temperature and the beds are just firm enough, investors shrugged off the Treasury scare. Instead of falling, junk bonds issued by heavily indebted companies rose. So far this year, they have returned 5.4 per cent, including interest.
Those fears from last summer of another US recession? A distant memory. Investors have poured a record $17 billion (Dh62 billion) into mutual funds that buy junk bonds in 2012, according to Lipper Inc, a financial data provider.
There was plenty of good news last week. Unemployment claims fell to 351,000, matching a four-year low. The Federal Reserve signalled that the economic recovery was gaining steam.
Apple rose 7 per cent just last week and closed Friday at $585. Just a year and a half ago, it was trading at half that price. And the Nasdaq broke through 3,000 for the first time since the dot-com days more than a decade ago.
Jack Ablin, chief investment officer of Harris Private Bank, is optimistic stocks will keep climbing. Still, he plans to start selling when the S&P 500 hits 1,450, less than 4 per cent higher.
He notes that individual investors, as opposed to pension funds and other institutions, have been pulling money out of the market, and that worries him.
"I'd rather leave a little cash on the table than get caught in a downdraft," he says. "I don't know where these gains are coming from."
One place to look is central banks around the world. They have kept rates at record lows, lent to banks or bought government bonds or other securities. That has put cash in the hands of the sellers, who can turn around and buy stocks and other assets. As it's bought over the past three years, the balance sheet of the US Federal Reserve has tripled to nearly $3 trillion.
Critics say all the new cash from central banks has led to wild speculation in all manner of assets — stocks, bonds, oil, corn. And just looking at the prices, it's hard to argue with that.
Then again, after the deepest economic downturn since the Great Depression, prices should be rising fast if the economy is truly recovering, right?
Fridson of BNP Paribas says the rise in Treasury yields last week is a good sign that the economy is indeed bouncing back. And he doesn't seem troubled that companies are issuing debt now at record levels — $380 billion so far this year.
Cause for concern
If you suspect it's too good to be true, you may be right. Some worrisome signs:
n Profits may not be growing: Companies in the Standard & Poor's 500 stock index are expected to earn 0.5 per cent less than they did a year ago for the first three months this year, according to FactSet, a data provider.
n Insiders are selling: Corporate executives are selling 14 times more of the stock of their own companies' stock than they are buying, according Trim Tabs.
n IPOs are still anaemic: So far this year, companies have raised $3.4 billion (Dh12.4 billion) in IPOs, down 78 per cent from a year ago, according to Renaissance Capital.
Then there was the scare that inflation may be looming. Treasury prices fell, and their yields, which move in the opposite direction, rose fast. The yield on the 10-year Treasury note closed Friday at 2.3 per cent and up nearly a third of point in five days.