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“Honi soit qui mal y pense (Bad things to those who think it bad).” —Motto: Order of the Garter

I always try to be reasonable. I listen to every argument with an open mind and try to sift out the value of everything I read. If the point being made is contrary to my own views, I pay even closer attention and weigh the arguments on both sides. Sometimes, however, I begin to lose my patience. Sometimes, I just do not see the merit of a line of reasoning.

The most recent example of this is the argument that the stock market’s powerful rise (over the past six months and over the past four years) has been the product solely of Federal Reserve (Fed) largesse, not a real improvement in fundamentals, and therefore, it is bound to end badly. It has been called a “sugar high” and the “feeding of an addiction to liquidity.” It implicitly invokes a lovely but lost world where fundamentals and stocks advanced peacefully together, a time when things made sense and earnings led prices higher.

The markets have been reaching record highs lately, but Chief Portfolio Strategist Dr. Brian Jacobsen believes we should be looking at inflation-adjusted numbers instead. Learn more by watching last week's segment "The Record That 'Should Have' Come Earlier" from Bloomberg TV's "Lunch Money".

“That old black magic has me in its spell. That old black magic that you weave so well.” —Johnny Mercer

“I am not dead yet.” —Queen Mary (spoken during her final illness)

The story is that the grand and redoubtable consort of King George V remonstrated her physician for turning his back on her as he left her sick room. He had assumed that she had passed on and believed that the honor was no longer necessary. When corrected, he turned, apologized, and bowed deeply.

I think that the cadre of experts who have persistently predicted a significant decline in S&P 500 Index earnings and the consequent death of the equity market might want to do the same.

Another quarter has come and gone, and corporate profits have yet to disappoint. While first-quarter revenue results were less than spectacular, earnings per share exceeded consensus expectations for 70% of the 80% of the companies that have already reported. Given the weakness in Europe and the uncertainty surrounding the budget issues in the U.S., it may seem like magic to the skeptical observers, but in my opinion, that is not the case.

Given the negative returns of target date portfolios belonging to people near retirement in 2008, much has been written about prudent levels of equity for those near retirement. However, if equity risk is a smaller portion of target date funds at retirement dates, then does that mean the bond portion now poses a substantial risk should interest rates rise? For an answer, we talked with Jim Lauder, CEO of Global Index Advisors.

Since interest rates remain near historic lows, it makes sense that interest rates will increase at some point. Can you give us your perspective on interest rates?
Interest rates have been at low levels for some time, longer perhaps than many thought possible. The 10-year Treasury yield has been less than 4% for more than four years, and it has essentially been below 2% for more than a year. Interest rates are reflecting the accommodative monetary policies of central banks around the world and global growth that is moderate at best and quite weak in other spots, notably Europe. So, while we do not think a sharp increase in interest rates is imminent, we do agree that interest rates are unlikely to move much lower. So, we are prepared for the next move, which we expect will be for higher interest rates eventually.

Your glide path for target date portfolios near maturity is one of the more conservative in terms of its equity risk exposure. Does that mean it has more bond risk?
Not necessarily. While we currently have more exposure to bond risk, or interest-rate risk, than many of our competitors, it is not necessarily true that we will have higher bond risk exposure going forward, for several reasons. First of all, our strategy is based on the Dow Jones Target Date Index methodology, which employs an asset allocation optimizer rather than a simple allocation among the main asset classes—equities, bonds, and short-term investments. 

In our case, the risk target of a portfolio for someone 10 years past their retirement date is conservative. To be precise, the Target Today Index has a risk target equal to 20% of the risk of the all-equity benchmark, with the condition that the actual equity allocation be within a 5% band in either direction of the targeted relative equity risk level (maximum of 25% equity and a minimum 15% equity). While that means that the maximum allowable bond allocation is 80%, based on a minimum 15% equity allocation and minimum 5% cash allocation, the optimizer can allocate as little as 5% to bonds under the right conditions. As interest rates rise and bond prices fall, the optimizer should begin to shift assets away from bonds and into our short-term investment portfolio, thereby shortening the overall duration of the target date portfolio and reducing the negative effect of rising interest rates on portfolio returns. While the optimizer will not eliminate bond risk, it does have the ability to soften the blow.

Portfolio Manager Ann Miletti joined other experts on CNBC’s Closing Bell to talk about where she’s finding opportunities in the U.S. stock market, particularly the information technology sector.

“Our life is frittered away by detail. Simplify, simplify, simplify.” —Henry David Thoreau

If Thoreau really wanted to simplify things, why did he repeat the word twice? Regardless of that, I think it is good advice, especially in our business. Analysis should be simple and straightforward, not simplistic or convoluted. It requires a fairly good understanding of a topic to strip away the nonessential and get to the core of the matter. I think that is particularly true of an analysis of the general direction of the market over the next 12 to 18 months.

There are some really big issues out there: Will Europe slide into a Great Recession? Will China finally prove the perennial skeptics right and collapse in a heap of overbuilt ruins? Will the Japanese central bank succeed after 20 years of failure and restart the machine that was the Greater Asia Co-Prosperity Sphere? Can S&P 500 earnings grow when profitability is near record levels and revenue growth appears to be grinding to a halt? Can America possibly deal with federal debt levels that, as a percent of gross domestic product, are approaching heights seen after World War II?

It has now been more than four years since the equity market bottomed in the first quarter of 2009. It certainly seems longer. So much has happened in that time that the weeks seem like months, and the months seem like years. The economic cycle now seems old and weary. Some of the major indexes have moved to new highs (in price, if not valuation). There are concerns that profits soon may roll over and take the stock market with them. Recent market advances have intrigued some but have made others more wary of corrections.

Yet, when I coolly survey the situation with an open mind, I see evidence that many aspects of the economic and market cycles are still in early times. I know that this seems odd, 50 months after a major market bottom, but here are some points for your consideration:

On April 23, around 1:07 p.m. ET, the S&P 500 Index dropped 1%, wiping out $120 billion in market value. Or did it? 

Similarly, on March 6, 2010, the Dow Jones Industrial Average dropped 9%, destroying over a trillion dollars in value. Or did it?

The answer to both is no. Just because a stock market indicator, like the S&P 500 Index or the Dow Jones Industrial Average, moves up or down doesn’t mean value was created or destroyed. There’s a difference between a stock’s price and a stock’s value, but the popular media often conflate the two. There’s a concept in finance called market capitalization, which is equal to the number of shares of stock outstanding multiplied by the current market price of the stock. That is not the same thing as the market value of a company. What would have been more accurate to report on April 23 was that, in those brief moments after a fictitious tweet went out that pushed stocks lower, the market capitalization of the S&P 500 Index declined by $120 billion, not that $120 billion of market value was wiped out.

“The dogmas of the quiet past are inadequate to the stormy present.” —Abraham Lincoln
“Everything old is new again.” —Peter Allen

I know that nothing ever happens exactly the way it did before. Times change. However, it seems to me that, in our business, once the conventional wisdom has decided that the old rules don’t apply, they can and often do.

It was that way with monetary pressure and the role of the Federal Reserve (Fed) in driving the equity market. Anyone who traded stocks between 1985 and 2000 learned that “you don’t fight the Fed.” If you looked back at the second half of the 20th century, you could find a tight correlation between Fed monetary policy and equity market direction. When the Fed was pursuing an expansive monetary and economic policy, stocks rose. When the Fed tightened, stocks fell. It was a much better fit than earnings, and we greeted the millennium sure of its efficacy.

Then it didn’t work anymore. Between 2000 and 2003, the Fed pushed and the stock market fell. Again, between 2007 and 2009, as financial chaos overwhelmed extremely positive Fed monetary pressure, stocks went painfully lower. The old rule seemed dead for a few years; then it wasn’t. From mid-November 2012 through mid-April 2013, both Japanese and American equity markets surged as their central banks pushed liquidity into the system. For a while, at least, it seemed as if the old rule ruled once again.

Today we have a guest post by Michael Bradshaw, CFA, portfolio manager with expertise in investing in gold, other precious metals and gold-related stocks.

Gold has been on a wild ride in 2013, and lately that ride has trended downward. Since the end of March, a series of events triggered a substantial sell-off in the gold price. Gold dropped 14% over two days, which was the largest two-day drop since 1980. There was no one specific catalyst for the sell-off. Instead, it was the result of hawkish commentary from the Federal Reserve (Fed), weaker-than-expected first-quarter gross domestic product (GDP) numbers from China, an announcement by Cyprus that it was considering selling its gold reserves, the breach of previously supportive technical levels, and gold sell recommendations from various brokers.

Of note, the Fed’s minutes renewed speculation of the end of QE3 (the third round of quantitative easing) by year-end, and the weak China numbers put downward pressure on commodity markets. In addition, the announcement by Cyprus has led to speculation that other indebted European countries, such as Spain, Portugal, and Italy, might also consider selling their gold reserves. While this is a possibility, it is important to realize that gold sales from Italy and Spain would fall under the CBGA (Central Bank Gold Agreement), which limits annual sales to a maximum of 400 tonnes combined through the agreement’s expiration in September 2014 (the agreement is subject to renewal).

 

“I can fly like I could before. I can fly with happy thoughts once more.”—Peter Pan

“My center is yielding, my right is retreating. Situation excellent. I am attacking.”—Ferdinand Foch, Battle of the Marne

Maybe we should call it a Peter Pan market. It certainly is exhilarating, and it doesn’t seem to grow old. It is 15 weeks into 2013 and already the S&P Composite is within 1% of the target we set for year-end. And we thought we were bullish!

It is not like everything is wonderful. Consensus earnings expectations for both this year and next year have not changed since the end of 2012. Asian markets are being rattled by bizarre nuclear threats from North Korea. The strength of China’s growth is being drawn into question by falling copper prices. Europe has seen a forced bailout of Cypriot banks and the confiscation of some of the assets of their wealthier clients. Italy is paralyzed by a political situation that seems to be straight out of a Roberto Benigni farce. Latin America seems to be flirting with populism as it seeks its future economic course. The death of Hugo Chavez has left a political vacuum in Venezuela, while the political fate of Brazil still seems far from certain. The dollar is up, gold is down, and the chairman of the U.S. Federal Reserve (Fed) says the American economy should remain on life support for the time being.

Isn’t it wonderful?

David Sylvester, head of money markets at Wells Capital Management, and team have released their latest overview, strategy, and outlook for money markets, including commentary on the events that unfolded in Cyprus over the past month.

Commitments to maintaining supportive and stabilizing eurozone policies by the European Central Bank (ECB), the European Union (EU), and the International Monetary Fund (IMF), collectively known as the Troika, were put to the test this month as Cyprus received a bailout to support its ailing economy and banking system. The bailout request, made last June but not finalized until now, was a consequence of 2012's Greek debt restructuring, which hit Cyprus hard due, in part, to sizable Cypriot investments in Greece and Greek sovereign debt.

Continue reading.

Jim Lauder, co-manager of the Wells Fargo Advantage Dow Jones Target Date Funds^SM, recently sat down with Reuters TV reporter Rhonda Schaffler to chat about how he and his team work to get 401(k) plan participants to retirement with the largest nest eggs of their lives. Key to their approach, he said, is the fund suite’s conservative glidepath near the retirement date. He also spoke about investor behavior and what drives investors—greed and fear—and how the team’s risk-based optimization process removes that emotion from investing for retirement.

This website is accompanied by prospectuses for Wells Fargo Advantage Funds^®.

The target date represents the year in which investors may likely begin withdrawing assets. The funds gradually seek to reduce market risk as the target date approaches and after it arrives by decreasing equity exposure and increasing fixed-income exposure. The principal value is not guaranteed at any time, including at the target date.

Stock values fluctuate in response to the activities of individual companies and general market and economic conditions. Bond values fluctuate in response to the financial condition of individual issuers, general market and economic conditions, and changes in interest rates. In general, when interest rates rise, bond values fall and investors may lose principal value. The use of derivatives may reduce returns and/or increase volatility. Certain investment strategies tend to increase the total risk of an investment (relative to the broader market). This fund is exposed to foreign investment risk, mortgage- and asset-backed securities risk, smaller-company investment risk and allocation methodology risk (risk that the allocation methodology of the Dow Jones Target Date Index, whose total returns the fund seeks to approximate, before fees and expenses, will not meet an investor’s goals). Consult the fund’s prospectus for additional information on these and other risks.

"Dow Jones^®" and "Dow Jones Target Date Indexes^SM" are service marks of Dow Jones Trademark Holdings LLC (“Dow Jones”); have been licensed to CME Group Index Services LLC ("CME Indexes"); and have been sublicensed for use for certain purposes by Global Index Advisors, Inc., and Wells Fargo Funds Management, LLC. The Wells Fargo Advantage Dow Jones Target Date FundsSM, based on the Dow Jones Target Date Indexes, are not sponsored, endorsed, sold, or promoted by Dow Jones, CME Indexes, or their respective affiliates, and none of them makes any representation regarding the advisability of investing in such product(s).

I was on vacation during the last week of March, and it was a good thing. While I am sure that the preceding sentence needs no further explanation to most of you, I think the benefits of my five days off went beyond the normal R&R.

I wrote and spoke less than I usually do. More importantly, I had more time to observe and think about those observations. I had a bit more distance between the market and me and a bit more time to spot oddities and parallels. Here are some of my observations:

Portfolio manager Margie Patel appeared on CNBC's Closing Bell last week to discuss what was driving the markets to record highs. During the clip, she also discusses the future direction of interest rates and how the Federal Reserve might start reining in its bond-buying program.

“It is one of the great paradoxes of the stock market that what seems too high usually goes higher and what seems too low usually goes lower.” William O’Neil, founder of Investor Business Daily

“I never buy at the bottom, and I always sell too soon.” Nathan Rothschild, founder of the London office of the Rothschild banking powerhouse

“You got to know when to hold ‘em, know when to fold ‘em, know when to walk away, know when to run.” Kenny Rogers, The Gambler

For every market situation, there is an aphorism or quote. Sometimes, the received wisdom on Wall Street is clear and sometimes downright contradictory. The S&P 500 Index hit a record high on Thursday. Some cheered and some gave it a derisive slow clap. I may have been in the latter camp. Why? New highs used to be the norm, not the exception, so it’s no big deal. Also, it was ingrained in me in economics that to compare prices across time you need to adjust for changes in the general price level. That is, you need to adjust the numbers for inflation. Doing that, the new high is still more than 10% shy of the October 2007 level. It’s approximately 28% short of the August 2000 high.

Chief Equity Strategist John Manley joined CNBC's Street Signs to talk about risk and opportunity in the market, his outlook through the end of 2014, and three sectors to watch.

“One day the great European War will come out of some damned foolish thing in the Balkans.” Otto von Bismarck (1888)

“There you go again.” Ronald Reagan (1980)

Every equity strategist wants to be Nostradamus, but, in this case, I think they would settle for being Bismarck. There is that deep-seated desire to be the one who correctly makes that big, big call—the one that so many missed, the one that’s a career maker. I guess the baseball analogy is swinging for the fences. The difference is that strategists can aim for the bleachers but check their swing at the same time.

The trick is to say it but not predict it. Something could happen. Something is possible. Something reminds you of something. Get yourself connected with a plausible but improbable outcome (preferably one that the investing public deeply fears or desires) and then play it by ear. If it happens, you said it. If it doesn’t, you didn’t predict it. For this strategy to really work, however, you must hit on something that resonates with a preexisting belief in the investor subconscious.

Knowing that, I probably should not have been surprised by what I heard last week. I heard three televised strategists say that Cyprus reminded them of the event that triggered World War I, the assassination of Archduke Franz Ferdinand (in the Balkans!). Mind you, they were not predicting a catastrophe, but they wanted you to know that, less than 100 years ago, a seemingly minor event on the periphery of Europe had led to one…and only Bismarck and they had raised the possibility. 

“If I gave you time to change my mind, I'd find a way just to leave the past behind.” Tim Hardin, Reason to Believe

“These are my principles. If you don't like them…well, I have others.”  Groucho Marx

In my opinion, the first quotation is a perfect description of what has been happening to investors in the last three months. (We’ll get to Groucho in a minute.) I think it is a big deal. I think it is a sea change. I think it is a tectonic shift. It doesn’t happen very often. It seldom happens on cue. But when it does happen, most of us are surprised by both its magnitude and duration.

Nothing about the equity market’s movements in the last four years makes any sense unless you realize that there has been an ominous consensus embedded in almost all of our psyches: “Sooner or later, we will have to pay for the excesses of the last 25 years. Sooner or later, we will have less wealth and see less growth because of past debts incurred and past promises made.” I do not think it is true. On the contrary, I think that the gradual effacement of this dread can provide the impetus for an extended period of rising equity prices. That process may have started with the new year.

“By the pricking of my thumbs, something wicked this way comes.” The second witch, Macbeth

“Boogie, Boogie!”  Groucho Marx, A Night at the Opera

They were both trying to scare you, and currently they are not alone. There are many scary things these days, and there are many people telling you that you should be scared about the equity market.

Perhaps the most obvious concerns are about the height and duration of the equity market’s rise, both over the last four years and the last four months. The S&P 500 has roughly doubled in price since the first quarter of 2009. Its (almost) uninterrupted four-year uptrend is fairly long by historical standards. The market’s roughly 13% surge since mid-November 2012 has surprised many and left a number of investors flat-footed and unsure if they should join the trend.

I believe that the conventional wisdom is that too much has happened too soon and that it is too late to buy equities. There is a certain irony in that many of these equity outsiders thought it was too soon to buy even as the recent rally began four months ago.