Pay Attention To Both The Stock And Bond Markets
They appear to be sending conflicting messages.
Happy Monday, readers.
A really brief but, I believe, important post to start the week. This is based both on carefully observing how my personal portfolio is behaving, as well as related financial reading and research.
Here’s what I noticed with my personal portfolio which, as regular readers know, is fairly conservatively constructed. As 2023 opened, the value of my portfolio shot up very nicely through February 2. In short, this was because both bonds and stocks did well. Apparently believing in a high likelihood of a Fed “pivot,” interest rates declined and everything moved in positive “risk on” fashion.
Then, things began to turn a little bit. I noticed that my portfolio began to decline to a greater extent than I would have thought, given how much stocks had declined. Paying attention, I noticed that a fair amount of the decline was due to my bond holdings.
With that in mind, take a look at the graphic below. It’s a simple one, from Yahoo Finance. In it, I track the price action of 4 ETFs over the past month, as follows:
VTI - A proxy for the entire U.S. stock market
VIG - A proxy for quality dividend-growth stocks, slightly more conservative than the overall market.
BND - A proxy for the entire U.S. bond market
TLT - A proxy for longer-duration treasuries, typically more dramatically affected by the movement of interest rates
I think you will immediately notice what I am getting at. There appears to be a disconnect in the behavior of stocks and bonds. VTI, the most “aggressive” of the 4, is up 1.8%. On the other hand, VIG is slightly down. In contrast, apparently reflecting a belief in “higher for longer” moving forward, the U.S. bond market, as represented by BND, has declined by 1.6%. And TLT, reflecting a longer-term view? Down some 4.1%.
My takeaway? That stocks may be a little pricey here. If what the bond market is thinking portends where stocks may go, at least in the short run, it might be a time to consider lightening just a little and stashing a bit more in cash. That’s what I did this morning, selling some AAPL, IXUS, and VNQ, and bringing the cash level in my portfolio to just a hair under 30%.
As always, thanks for reading. Take everything I share with a grain of salt, as I don’t know the future any more than anyone else. At the same time, I hope this offers some simply-presented food for thought.