Appetite for Risk Is Back – Why You Should Be Buying
The shift from safety to risky is already happening. Investors, no longer excited by paltry yields on treasury bonds, are finding that stocks are the only way to really grow their wealth. This is good news for the market, and should be good new for you, pending your re-entry to the global stock markets.
Where to Find the Inflows
The largest inflows today are in growth mutual funds. This is good news as mutual fund investors typically have a long-term outlook and are not interested in swapping funds in and out as the markets ebb and flow. Also, fixed income is starting to dry up, indicating that investors no longer want to be holding debt with stocks still 33% lower than just two years ago.
Why now?
For the most part, we’ve seen a spectacular rally since March, when stocks hit their lows. Since that time, financial stocks have performed well into the triple digits, real estate has made a comeback, and general indices are showing year-to-date improvement despite three-month lag to the most recent rebound.
The Stimulus Effect
Cash for clunkers was a success, at least in getting people to buy cars right now. The stimulus will be a success, at least in flooding the economy with cash. One of the biggest stimulus efforts, the homebuyers tax credit, has successfully flooded the economy with cash. That program, which was only a few billion in expense, will certainly be shadowed by the remaining $350 billion to be spent in 2010. Keep in mind, to date, we’ve spent just over $102 Billion.
Job Losses Are Running out of Steam
Another reason for sudden jump in confidence, and the markets, is that as far as employment goes, we’re touching the bottom. Anyone who was going to be unemployed is now unemployed. Recently “improving” numbers seem to be the last of the collateral damage. We can’t lose many jobs when we’re already at a record low in employment.
If you invest now do so at your own risk. I see the market tumbling downward at the beginning of the year at the latest, and possibly even next month. Why? Programs like cash for clunkers and the housing credits, which you mentioned in the post, simply delay a recovery. Right now demand has dropped considerably, and programs mentioned above do two things which delay the recovery.
1. Encourage people to take on more debt. This might be a credit crisis, but also a crisis caused by credit as people have taken on debt they can’t afford. In order for a recovery with substance, a deep deleveraging must take place on the part of consumers.
2. These programs are temporary in nature because they keep suppliers producing at a level which doesn’t match natural demand on the part of consumers. In other words, these programs provide incentives to produce too much product. It will dive down after the programs end.
Add weekly treasury auctions of 100-200 billion which we don’t know how we’ll pay back in this NEW economy, and we might be in trouble. Hold on tight, the next few years will be very rough.
I agree with the prolonged effects of economic stimulus. However, in the short run, I see the influx of cash to be something that will drive the markets forward.
True economic recovery, that is, growth in standard of living and real capital investment is still many years off. My expectation is that we’ll have a few years of inflationary “growth” but likely experience what Japan did in its lost decade. Unemployment, economic clout, and limited growth in industry and manufacturing are here to stay, but I think 2010 could look really good especially considering the money coming down the pipeline.
I am a market technician, and as such I try not to get caught up in the fundamentals or sentiment. Having said that, the market seems poised for a healthy correction – perhaps to 960 or even 920. This amount of correction would still leave this rally in tact. For this reason it is considered healthy. I think there are many strong fundamental arguments for a correction – and sentiment has indeed become a blinding force.