We all know Americans are crazy for baseball and apple pie. Some Commerce Bank economists recently lumped the bond market into the nation’s iconic category.
Over lunch at an invitation-only investment summit last month at White River Conference Center, the economists flipped through charts of gross domestic product and national debt, as well as trends in U.S. auto sales, housing starts and employment. For the unseasoned eye, it felt at times like a 105-mph fastball from the arm of Aroldis Chapman.
But economic analysts talking in terms of America’s classic favorite pastime slowed things down for me.
“We think we’re in the ninth inning. We could go into extras,” Commerce investment strategist Joe Williams told the room of 200 people. “The market is overvalued.”
At the conclusion of Commerce’s 2017 Outlook for the Financial Markets, I followed up with Williams and his colleague, Scott Colbert, to learn more.
Basically, we’re in our eighth year of national economic expansion, albeit slow, and historically 10 years is the maximum before a market correction takes place.
Williams’ evaluation refers to the investment market’s asset allocation, currently high in mutual funds and exchange traded funds. Recent ETF and mutual fund levels are on par with past highs in the 63 percent range in 2000 and again in 2007. There was a market correction following each peak.
“That’s when you go into extras,” Williams said. “But your risks are increasing.”
So, the writing’s on the wall. Once again, history is a trusted predictor of future stock market performance. In this case, though, the Commerce economists disagree slightly on the timing. Colbert’s correction forecast is about an inning behind Williams’ call.
However, they’re both bullish on the bond market, and they point to the 10-year government bond yields as proof: The U.S. bonds more than double the international average yield of 1.08 percent, and they beat the countries of Japan, Germany, France, Spain and the United Kingdom. The closest country to the U.S. 10-year bond yields of 2.39 percent is Italy’s 2.31 percent, as of March 31.
They recommend 30-year Treasury bonds. They’re also gung-ho on emerging markets.
“Take your winnings in the (Standard & Poor’s) 500 and add them back into the international markets,” Colbert suggested.
Either way, he warned, “You’ve got to get cautious toward the end of an economic expansion.”
Before you expect the Federal Reserve to soft-land the economy, the Commerce economists remind us it’s only happened once – in 1994. From their vantage point, a sizable correction is in order.
With extra innings pending, they also suggest getting really comfortable with what you have in stocks.“If it drops 20 percent, so be it,” Williams said.
And one thing we know about extra innings, the game can end by one swing of the bat. In this investment game, we’ll just have to wait to see who or what is in the batter’s box when the correction begins.
“You never know what’s going to set it off,” Williams said.
Springfield Business Journal Editor Eric Olson can be reached at eolson@sbj.net.
