For a long time I used to read Reminiscences of a Stock Operator, the putative market observations of Jesse Livermore, the legendary trader who was active in the first four decades of the 20th century. Having let that habit lapse for nearly a decade, I decided to revisit the book a few months ago. It is a work that any serious investor should read and probably re-read every so often. Way before anyone ever heard of behavioral finance, those reflections are a near-perfect compendium of how market activity and individual psychology combine to create an ever-changing array of ways to make investing mistakes and to (presumably) learn from them.

At a recent investor dinner, I was asked for some macro comments and thoughts on the market. What is expected, of course, is an economic outlook replete with expected GDP growth rates, the outlook for earnings, interest rates, inflation, Fed policy, global forces that may impact the U.S. market, followed by what that means for the stock market. Rather than go through that drill, I just quoted the line above from Old Turkey.

One does not have to squint to see the unmistakable direction of the market, whether the time horizon is year-to-date 2017, the past year, the past three years, the past five years. We are over nine years into a bull market that has taken the S&P from around 660 to 2425. Quite remarkably, this has occurred while investors have persistently taken money out of equities and put that money into bonds (with a few brief exceptions, notably during the so-called taper tantrum of 2013), even as interest rates continued to decline to a level not seen in 5000 years. People seemed quite comfortable buying fixed income securities at the highest valuations in history while shunning stocks. The reason, of course, is that bonds are “safe” while stocks are “risky.”

Bond yields peaked in October of 1981 and have been declining, on average, for over 35 years, an entire investing lifetime for most people, providing both income and capital gains in an instrument with greater contractual safety and far less volatility than stocks. That is all in the process of changing, as is becoming increasingly clear.

The Fed has begun a tightening cycle, which is currently benign, but history would suggest that will eventually give way to something more ominous. The ECB is still engaged in its massive QE program, but Mario Draghi has begun to signal that may be about to change as the European economy continues to strengthen. Eurozone short rates at -0.40% are likely be a thing of the past before too long.

READ FULL ARTICLE HERE