The Most Expensive “Free” Advice – 2014 Update

The Insightful Investor is skeptical about unsupported assertions.

It is really too bad that there is not more filtering in the rush to publication or air time. It is a function of all of those empty columns and hours to fill. The result? Certain ideas gain currency at popular blog sites and the cycle of repetition begins. The idea gets repeated so frequently that it becomes the new conventional wisdom –Wall Street Truthiness!

Recognizing these bogus ideas is absolutely crucial for the successful individual investor. Here are the most recent candidates, fresh off the presses in 2014!

  1. The Sophistry: The Fed is “taking the punch bowl away.” (too many sources to cite – take your pick)

    The Reality: This is a play on the old William McChesney Martin line. It is a typical colorful and simplistic effort to convince without evidence. If you look at history, a period of zero short term rates is maximum stimulus. The recent QE efforts were exceptional both in concept and in scope. If you insist on a booze analogy, the end of QE means that the Fed is spiking the punch with 80 proof instead of 101!

  2. The Sophistry: Everyone is so bullish – sentiment signals a market top. (Many sources, but Lance Roberts is typical). Roberts cites “stark-raving bulls” and warns about what happens when all experts agree.

    The Reality: The consensus of market strategists is for a decline in market prices in 2014. FactSet’s excellent summary report has this conclusion, actual data in a complete report that is a must-read:

    “Market strategists, on the other hand, predict the S&P 500 will see a 2.3% decrease in price over the next twelve months.”

  3. The Sophistry: Rising interest rates will undermine higher stock prices – yet another overly simple heuristic.

    The Reality: The relationship between the P/E multiple and stocks is a bit complicated. I have often described it is curvilinear. If interest rates are too low, it reflects deflationary fears. Since no one really believe the “E” in the earnings forecasts, the multiple is low. As the economy improves – the stage where we are now – stock multiples actually move higher. The logic is quite clear, but hardly anyone understands it. You can look at my research, or if that is not convincing, you can look at this chart from JP Morgan.

As you can clearly see, rising interest rates are consistent with higher stock prices, until the 10-Year Treasury Yield gets to 5% or so.

Reader nominations for more examples of “truthiness” are always welcome!

Past entries of relevance:


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  • john January 9, 2014  

    There is a problem with the JPM plot graph in regards to your argument. The data presented is from 1965 to 2013. 10y treasury rate did not go below 4% until 2008 during that time span. That means all the data points below 4% was during last few years. This period only saw falling rates AS A FUNCTION OF TIME(ie. yield change yoy was negative).
    So the plot graph leaves out S&P return as rates rise OVER TIME (ie positive yoy rate change).

  • oldprof January 9, 2014  

    John — I actually did a lot of work on this some years ago. Some of my early blog posts exposed the errors by one of the top Street analysts, whom I did not name. Here are some links from my research, which pegs the inflection point a bit lower:
    If you look at the chart for the ten-year, you will see that there was plenty of trading in this range during the early part of the last decade:,
    Finally, I encourage you to consider the logic — that low interest rates often reflect skepticism about earnings.
    Some pundits just find reasons to throw out both data and reasoning that does not fit their story.
    This is a curvilinear relationship. The data tell a clear story, perhaps better shown in my work than JP Morgan’s. Would it surprise you that more people give credibility to their research than mine? That is why I cite it:)
    Thanks for joining in, as you have done helpfully in the past.

  • kurt January 10, 2014  

    The JPM plots correlation coefficients. It seems the chart says there is little to note correlation between stock returns and 10 yr treasury yields. At best, yields have a weak effect as described. Statistically the data is utterly undifferentiable from noise for the 4-8% yield range.

  • john January 10, 2014  

    Hey Prof,
    I believe we are talking about 2 different things. Your data shows S&P return as a function of prevailing 10y tsy yield.
    What I (and the 3rd sophistry) am asking is, what is the S&P return plotted against change in yield over time.
    For example, is S&P return same when going from 3.2 to 3.5% over a month vs. going from 3.8 to 3.5%. intuitively i think no.
    If you look at the FRED data from 1963 to 2013, yield started at 4% while in an uptrend. It peaks at 12% in 1983. Since then it has steadily fallen, passing 4% mark during the naughts, finally bottoming at 1.5% in 2012. That means most of the data point below 4% was in recent years, an environment where yields were FALLING.
    What does the scatter plot look like if you expand the sample, say from 1913? Will the curve fit still hold?
    thank you

  • oldprof January 10, 2014  

    John – I don’t think really old data enlightens us much.
    You are correct in observing the general trend of rates during that time, but there were some fluctuations.
    I am aware that some sources are attempting to dismiss inferences from the entire time of falling interest rates. In general, these observers saw that as a great time to buy bonds — not recommending stocks. If you follow my links, you will see that the reason for ultra-low rates is skepticism about earnings and deflationary fears.
    We are now seeing the reverse.
    I guess we’ll soon have more data, but I am interested in the reasoning behind the alternative viewpoint.