In his latest nightly note, Mike O’Rourke of JonesTrading comments on this seemingly gravity-defying, can’t lose market.
The End of the Free Lunch Trade?
Early on in most Wall Street careers budding financiers are taught there is no free lunch on Wall Street. That stems from the belief that you cannot get something for nothing. For the past 18 months, and more specifically the past 6 months, the market has acted as if there is a Free Lunch – Central Bank policies of promising perpetually low rates, asset purchases and support for whatever ails or does not ail the economy.
Despite middling but expansionary economic data and unimpressive earnings growth, equity prices have bounded higher. Low rates have fuelled corporate debt refinancing and buyback programs. The low rate environment has made fixed income products so expensive that everything else looked relatively inexpensive. Today, the S&P 500 opened up over 1%, which was on top of a 55 basis point pre-holiday mark-up into Friday’s close. The Dow Industrials’ streak of avoiding three consecutive negative closes in 2013 remained intact. It turns out the Free Lunch is an “All You Can Eat Buffet.”
O’Rourke goes on to warn about higher rates as the possible death knell of this Free Lunch Trade.
Bigger picture though is that the airwaves are being consumed with talk like this: Bubble! The Taper! Too far to fast! And so on.
Amazingly, before the market has even fallen, the wall of worry is being rebuilt before our eyes.
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