The Adens: What Next for Stocks and Bonds?

08/27/2014 9:00 am EST

Focus: STOCKS

Mary Anne & Pamela Aden

Co-Editors, The Aden Forecast

We realize this bull market has already been a long one; one of the main reasons why is the Fed’s super low interest rate policy, explains Mary Anne and Pamela Aden, editors of The Aden Forecast.

The market loves low interest rates and it’ll likely keep rising as along as rates are low. The market also loves the Fed’s QE stimulus. This too has been a big factor driving stocks higher.

But QE is due to end in October and the big question is, will the stock market be able to keep rising once the QE punch bowl leaves the party?

We don’t know, but here too there are pros and cons. Basically, it’ll depend on the economy…if it can stand on its own. If not, the Fed will likely bring the punch bowl back to avoid a steep stock market decline and/or a recession.

Jeremy Grantham’s “Presidential Election Cycle Indicator” shows that stocks have not had a losing year during the third year of a presidential term, going back to 1932. Plus, the third year has averaged a 26% return.

Grantham’s third year starts on October 1, which means we’re only about six weeks away from the best time to historically own stocks. This doesn’t mean it has to happen. But it is impressive considering this indicator has been 100% accurate for over 80 years.

For now, we continue to recommend keeping the stocks you have. For the most part, our recommended stocks have held up well. The strongest ones are iShares Hong Kong ETF (EWH), iShares  Mexico ETF (EWW), Microsoft (MSFT), and the  PowerShares Nasdaq QQQTrust  (QQQ).

There’s also a good chance they’re leading the way up, and the weaker markets will follow. But until this tug of war is resolved, one way or the other, we advise caution.

Bonds have been the best investment so far this year. And this will likely continue. Bonds are bullish and poised to head higher. That is, interest rates are set to decline further.

We still advise buying and holding 35% of your total portfolio in over 10-year US government bonds.

We also like the bond ETFs, like iShares Lehman 10-20 Year Treasury Bond ETF (TLH), SPDR Lehman Long Term Treasury (TLO), ProShares Ultra 20+ Year Treasury ETF (UBT), and iShares Barclays 20+Year Treasury Bond ETF (TLT). If you want to buy new positions, these are the best.

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