Caldwell Trust Company – Building Wealth and Preserving Legacy Blog

Stocks in 2014 lag 2013's stellar performance; maybe that's good

Written by Caldwell Trust | Mar 3, 2014

U.S. stocks have taken a pause in their upward march. They began 2014 in uncertain territory, on the heels of  headlines about China's dealing with questions about what investments their government backs, then further challenged by steep corrections in both currency and stock markets among emerging markets.

We are reminded of the safe-haven status the U.S. still enjoys from a global financial market perspective. As we have said in the past, when global markets get choppy, the U.S. is a calm harbor in a rough sea. Investors flock to U.S. investments in search of safety and liquidity. One of our metrics to explain this is simple: The U.S. 10-year Treasury bond, which began 2014 with a yield of around 3 percent, had dropped below 2.70 percent as of this writing (mid-February).

Why the drop? In our view, it's a sign of global investors buying U.S. bonds in their flight to safety and quality. They make this decision because the U.S. Treasury market is very deep and liquid and can accept large global inflows. Although such inflows can lead to a drop, when the dust settles Treasuries are seen as an effective way to keep invested money safe and even return it with some interest. Furthermore, as we look ahead, we do not see any significant challenges to the safe--haven status. Perhaps this might happen someday, but we see no imminent threats.

At this writing we have gone 1.5 years with no correction greater than 10 percent from its highest point, a rather noteworthy run. Is this the end of the sell-of? The answer is unknown. However, what we continue to believe is this: Stocks, on a relative basis, offer a stronger risk/return profile than bonds on a look-ahead basis.