Why This Latest Rally Will End Badly for Stocks

crashDavid Fabian: There is a phrase that is often associated with euphoria, bubbles, and overheated markets.  Four little words that proclaim: this will end badly.

I have even felt myself utter that phrase during various stages of my investment career.  Sometimes it’s true and other times it’s not.  It’s most prevalent when you see a specific asset class behaving in a way that many people think it shouldn’t.  Bonds that act like stocks.  Stocks that act like bonds.  Trends or correlations that seem like they will never end.

These are some of the most common examples, but it doesn’t stop there.  Some people think the whole system is rigged.  They think the Fed is manipulating the markets.  They believe that robots and algorithms have taken over control.  They are even skeptical of investment vehicles like exchange-traded funds because they are prone to temporary trading hiccups that are demonized in the media.

So the only logical choice is to stay on the sidelines.  Hide out in cash and wait for the apocalypse that will come with global upheaval, hyperinflation, currency devaluations, social unrest, and general chaos.  It will end badly they assure us.  This time it’s different.

The Evidence

Yet despite all those assurances of destruction, something interesting happened this week.  Major stock and bond indexes hit new all-time highs.  Not only that, many commodity funds have also experienced some of their biggest gains in years.  That doesn’t sound like the makings of a broken system to me.

Even just a simple 50/50 portfolio of the SPDR S&P 500 ETF (SPY) and iShares Core U.S. Aggregate Bond ETF (AGG) is up about 6% this year.  That’s not too bad for six months’ work.

Investors who have stayed true to a disciplined, diversified, and sensible investment approach are probably seeing their accounts at or very close to the largest balances ever.

The tin foil hat crowd?  Not so much

The Subterfuge

It’s a funky world out there.  Negative interest rates are the new normal.  Stock market valuations are near the top end of their range (with the exception of the early-2000 bubble years).  Precious metals have been a disaster for a half decade and are now just starting to perk up again.

Some people are screaming that this is just the start of the biggest bull market in the history of the world.  Others are proclaiming that the truly darkest days are not far in the future.

I can see where the skepticism comes from.  Who do you trust at times like these?

It’s easy to let fear drive your investment decisions.  It’s a powerful motivator and you can easily rationalize a lack of exposure in stocks or bonds to protecting your best interests.  Nothing could be further from the truth.

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