The past few weeks many investors have learned a valuable lesson: safety comes at a price. Since the beginning of the year, the prices on 30-year Treasury bonds have been steadily falling. When we made our New Year’s predictions we stated that, in our opinion, bonds, particularly Treasury bonds, would be the worst investment for 2009.
Now, less than six months later, the 30-year treasury bond has lost nearly 40 percent of its value year-to-date. Hit particularly hard are those investors who rode the stock market down in fall 2008, decided to make a change at the end of the year, after suffering 30 percent losses or worse on average, only to buy “safe” treasury bonds and compound their losses with another 40 percent so far this year.
This scenario is a sobering illustration of why we constantly tell investors that they can’t make money investing for the past. In order to be successful, investors must look forward, anticipate future market conditions and invest accordingly.
For example, at the turn of the New Year, we predicted that oil would creep up and end the summer somewhere in the range of $70 to $85 per barrel. Currently, it’s just more than $62/barrel, up from its low near $35, and gas is more than $2.60/gallon at the pump. Furthermore, oil looks poised to move higher, especially considering current events in the Middle East and the Far East.
Recently, Iran sent six warships out into international waters. One is causing particular worry as it headed straight for the Gulf of Aden, directly adjacent to the Red Sea. Of course, if it made its way up the Red Sea it would be capable of firing rockets into Israel.
Making even more headlines was North Korea’s nuclear test, followed by the firing of three short-range missiles from its east coast. North Korea also stated that it would no longer honor the 1953 armistice agreement that ended the Korean War. All of these events seem to be signs that the country is preparing to resume its conflict with the south.
Many of these events, despite their implications, are not overly surprising. Even Vice President Joe Biden has said that President Barack Obama would be tested. It’s seems now that there is a race to see who will test him first. While we may not agree with Obama’s policies, we wish him the best of luck, as our national security depends on his ability to guide us through this tough time.
Despite tense foreign relations, however, things seem to be looking up at home. The economy is beginning to pick up again as credit is resuming a normal flow and consumer confidence recovers. In fact, consumer confidence numbers released on May 26 show the biggest one-month jump since 2003, when the United States was coming out of its last recession.
The stock market continues to surprise people on the upside. Many investors thought of recent market action as simply a bear market rally that should have turned back down by now. However, the market seems content to continue its upward trend, supporting our view that this could be the start of something much bigger than people think.