The overdue market correction analysts and pundits have been waiting for may have arrived with the breakdown of the S&P. It has been a two stage process, with Japan breaking first and the U.S. and the rest of the world following suit. One of the interesting aspects of this correction is that bond yields are moving higher as stock prices have been moving lower. In Japan the focus has been on a bond yield rising in a nation with very high debt levels. In the U.S. yields have been going up too, and the buzz has been that the Federal Reserve may start “tapering” down their $85 billion bond buying spree (known as QE Infinity).
Getting beyond the noise, I think markets got a bit extended and frothy, and sooner or later were due for a pull back. I don’t believe that 90 basis point yields in Japan or 2.19% ten year U.S yields are cause for a bear market. I also think the murmur over tapering is premature, as the data is still uneven with plenty of soft pockets, and inflation continues to be nonexistent.
For the moment…
- We don’t see a cycle change occurring
- We don’t believe the longer term technical conditions will turn bearish
- We don’t believe valuation is driving much of the current market move
Our current allocation is slightly under benchmark levels of volatility. The current correction is overdue and it’s healthy to see markets take some of the froth out. We are not looking to get more defensive here – in fact, if we get a decent pullback over the next month or so we may just use this as an opportunity to put our portfolios back onto a neutral allocation. While we appear to be in the midst of a market hangover, remember that a healthy correction could be just what the doctor ordered to refresh this bull market run for another leg up.