Is ‘smart money’ changing their dance?

Friday, the spread between 2 year and 3 month Treasury yield turned negative. (this is my personal chart that i track daily to keep focused on rate changes – source)

This prompted the question – as longer term investors will often state that between the two markets – bonds and stocks – the bond markets are the ‘smart money’. If you agree with the premise that there is a direct correlation between economic growth and interest rates (the higher the growth, the higher the rates), then economic growth looking forward in declining according to the smart money.

MarketWatch published a post this weekend where the author claimed to use the valuation methods employed by some of our ‘smart investors’ – Buffet, Shiller, Tobin, and Jones – for an annual return rate of the S&P 500 over the next decade. While anyone can question if those guys really represent ‘smart investors’, but look at their annual growth projections – 2.6%, 2.0%, 0.5%, 4.1%. Those numbers are in high contrast to the stock returns of the last 10 years.

Two sources of perceived smart money are pointing to a much slower economic growth and the resulting stock returns. Surprises could pop any time, any where … but something to certainly consider as portfolio managers refine their risk management and allocation targets … my Q1 portfolio review will modify risk scenarios accordingly.

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