Monday, 1 August 2016

US stock rally underpinned by bonds even as risk-reward for Treasuries looks "horrific"

As the US stock market hovers near record highs, Jeff Sommer at the New York Times said that the bond and foreign exchange markets have provided the underpinnings for the stock rally.

“Bonds have risen sharply in value, and their yields, which move in the opposite direction, have plummeted,” he wrote. “That has made stock prices look cheap and dividends generous.”

In addition, the strong dollar has made stock sectors that are fairly impervious to exchange-rate shifts especially attractive, he said.

However, Sommer quoted Craig Moffett, a senior analyst at MoffettNathanson, as saying: “Many of the valuations in the market don’t make sense right now in isolation. The risk for investors is that if interest rates start to rise, stock prices could start to shift almost overnight.”

Indeed, Jeffrey Gundlach, the chief executive of DoubleLine Capital, said on Friday that stock investors have entered a “world of uber complacency”.

In an interview with Reuters, he said that the risk-reward ratio for Treasuries is “horrific” and there is “no upside” in Treasury prices.

He suggested that investors “sell everything”. He added: “Nothing here looks good.”

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