Are you looking at the markets and thinking that they are too expensive? Do the prices of equities make you wonder if they are too high to buy now? Does the market have room to grow at the current levels? While the markets are experiencing a long Bull market run since the lows of the recession of 2008 and 2009 we are far from some historical marks. And there is no way to tell what will happen next in the markets, and anyone telling you otherwise is selling you lies. In fact, no one knows what the markets will do next or how they will react to any one of a host of issues that can affect the markets as a whole.
Oil is coming off some of the lowest prices we have seen in many years and are well off the high of the mid to late 2000’s. In the last ten years, oil was as high as $140 plus a barrel around July 2008 at the start of the last recession. At that time, both the markets and the price of oil were experience high values at the same time. Recently oil has gone from $102 a barrel a year ago to a low of $47 a barrel in March of this year. In the last year, the markets have experienced all-time highs in their values while oil has seen a dramatic decrease in the price per barrel. So it is clear that while the price of oil did fall with equities during the last recession current actions have shown that is not always the case. Equities are closing at all-time highs while oil is now hovering around $60 a barrel meaning the two, in this case, are not necessarily related. Some reasons for this are the US is producing more oil than it ever has and is relying less on foreign oil for its needs. With new drilling technics, the US has become a world leader in oil production.
Now here, I agree with Berkshire Hathaway’s Vice-Chairman Charlie Munger when he states we need to continue to import foreign oil and preserve the reserves we currently have in the US for our future. I also agree with him that we should not export any natural gas and maintain our reserves of that as well. At some point, the US will make the switch from oil-based gasoline to natural gas for the powering of vehicles and we will need our vast supplies of natural gas here at home. As he put it, but in not so many words, let’s use the other fellows oil before we use our own. It is a good strategy and one that will ultimately put the US in a position to have oil for many years to come.
Gold is another aspect many people associate with the equities markets as many see them as a hedge against inflation and as an asset that acts in the opposite manner from the markets. Here the price of an ounce of gold in July 2009 was $953 an ounce. And during the latest bull market while the equities were seeing extreme growth gold hit an all-time high of $1,870 an ounce in September 2011. Now an ounce of gold is hovering around $1,200 an ounce and has been fairly static for some time now. I understand that many people also look at silver that has taken a similar path as far as prices, but it does appear to be further undervalued when compared to gold as historically silver has been a twentieth the price of gold. If this were to hold true silver should be closer to $60 an ounce instead of the $17 it is now selling for. Do I see the price of gold and silver going up in the near future? I think it is a distinct possibility as they are selling with fairly low values but until the prices do go up and it becomes economically viable to mine these precious metals I see the prices making gradual moves in the near future or at least until inflation and interest rates begin to rise.
Interest rates are another area that many people look to when trying to predict the future action of the markets. While it may seem true that when bond rates do go up the markets tend to suffer the last ten years have been a very strange situation indeed. Since the start of the year, the ten-year Treasury rate has gone up from 1.88% to 2.21% but are down from the start of 2014 when they were 2.86%. So in this particular situation of the current year rates have seen an increase and the markets have hit all-time highs. But yes since the last recession rates have been kept at historic lows that have enhanced the markets ability to experience these highs. But at some point the Federal Reserve will back off of their policies of keeping rates low and the effect it will have on the markets cannot be known.
The markets should be driven by the economy as a whole but people tend to focus on these three areas the most to try to determine what will happen next. As I pointed out there appears to be little in the way of correlation between these three sectors and the markets as each has seen all-time highs and lows while the markets keep churning away and hitting new highs. What will happen next is anyone’s guess. Prior to the fall of the markets in the last recession the S&P 500 had a P/E ratio of 123 and is now around 21. With that in mind, you can see we are at levels far below the inflated prices of 2009 and in theory it leaves the S&P 500 with a lot of room to grow further. Earning are better than they were in 2009 and appeared to have some stability while many companies are indeed experiencing growth despite the fact most people see the economy as still being weak. The economy is healthier than most people think, and it is continuing to get stronger although it is not apparent to most of us and is not going as fast as we would like.
Things in the financial world are all over the place in today’s markets. We see multi-year lows in one area while seeing all-time highs in others. Do not try to time the markets as that will lead to nothing but poor results in your portfolio. I say you can also ignore oil and gold to a degree as there are factors that are leading to their current pricing levels that are outside of the historical norms. Interest rates are the one area that I can see that will have a direct impact on the markets as people may pull out of the markets if bond rates do get high enough to make the switch worth their time and trouble.
Do not think that these things I have discussed do not affect the markets as they do and have in the past. It is just in today’s markets I see them not relying on one another as they had prior to the last recession when they moved in a manner that was expected. That has since changed, and it is a new economy, and we may be in the new uncharted territory when it comes to the interaction of the four topics discussed.
If you have any questions or would like, more information feel free to contact me.
