Investors are holding their noses and buying stocks

Investors are holding their noses and buying stocks
Stocks are near record highs despite concerns about trade tensions with China and what's expected to be another round of lackluster corporate earnings next month.

TINA (There Is No Alternative) has become a popular mantra on Wall Street.

It explains why stocks are near record highs despite concerns about trade tensions with China and what’s expected to be another round of lackluster corporate earnings next month.

Not even a huge surge in crude prices Monday following an attack on Saudi oil facilities over the weekend was enough to dampen investor enthusiasm all that much. The Dow fell a little more than 150 points, or about 0.6%, Monday. That’s a pretty tame drop, especially when you consider that the blue chip average had gained for the prior eight trading days.

It appears that investors are holding their noses and buying stocks because of the TINA trade. With the Federal Reserve expected to cut short-term interest rates again at its meeting this week, stocks could get another boost.

“With flat earnings growth, the principal reason — and perhaps only one — that stocks have bounced back is the reversal in Fed policy,” said Troy Gayeski, co-chief investment officer at SkyBridge Capital. “The Fed is coming to the rescue again.”

Lower rates may help prolong the US economic expansion and prop up consumer spending and the housing market. That could be good for profits in the fourth quarter and 2020. That’s a big reason why the Dow is now up 16% this year while the S&P 500 and Nasdaq have gained about 20%.

Bonds are a bust

Bonds are not all that attractive when compared to stocks because of how low long-term yields are. The 10-Year Treasury yield is just 1.87%. Many top stocks pay dividends that are much higher than that, such as Dow components Exxon Mobil, IBM, Verizon and Pfizer.

Yields around the rest of the world are even lower. With fears of a disorderly Brexit plaguing the UK, British 10-Year yields are just 0.7%. Recession concerns in the European Union have pushed German and French bonds into negative territory. The rate on Japan’s bonds remain below zero as well.

So it’s no wonder that investors — even those who are getting closer to retirement and might want to consider more bonds — are once again flocking to riskier assets like stocks as well as bitcoin and other cryptocurrencies, which have surged this year.

Complacency may be starting to creep into the market’s mindset as well. The VIX volatility index has plunged more than 40% in 2019. The CNN Business Fear & Greed Index, which looks at the VIX and six other gauges of investor sentiment, is in “greed” territory.

But the stock market may still have some room to run, says Nela Richardson, investment strategist at Edward Jones. She argues that investors can’t underestimate the Fed’s willingness to keep the economic expansion going.

“This bull market could tread on even though we are in the latter stages of it,” Richardson said. “Remember that it is rising interest rates that haunt markets not lower rates. Bull markets don’t die of old age. They are often murdered by the Fed.”

Richardson adds that long-term investors should consider health care stocks and less cyclical consumer staples companies such as food and beverage makers as solid and safe long-term investments. Both sectors also pay healthy dividends.

Economy still humming along and Fed may save day again

There’s another possible catalyst to push stocks higher: Fed policy continues on a dovish course and the United States and China, which have recently extended olive branches to one another regarding tariffs — come to a long-term agreement on trade.

“We don’t know if a trade deal can prevent a recession. We don’t know if the Fed can prevent a recession. What we do believe is both of them doing their part in concert would,” said Brett Ewing, chief market strategist with First Franklin, in a report.

The recent spike in oil prices may not have that big of a long-term impact on the markets either.

“The US economy is not as sensitive as it once was to oil prices so this is nothing to panic over,” SkyBridge’s Gayeski said. “The strength of the consumer is keeping the economy afloat.” He added that we would need “meaningfully higher” oil prices — around $100 a barrel — to take the wind out of consumer’s sails.