It appears we have moved to a new phase of fear in the market. Some key economic indicators have reversed, and this has sent investors scrambling back to the “safety” of low-yield Treasuries. The article today by Brewerfutures, Falling Treasury Yields Indicate Investor Fear, sums it up nicely. Here is an excerpt …
Many veteran investors have always said “if you want to know the direction of the economy then watch the Treasury yields”. Based on the current price action and backed by last week’s dovish statement from the Federal Open Market Committee, investors are increasing demand for the lower-yielding Treasuries, indicating that the U.S. economic recovery may be slowing.
Today’s precipitous drop in the market takes us back down to some critical levels. Does this portend a steeper decline, or is this just a reaction to the spate of economic “bad news?” What will it take to give the market a boost? And what if the employment data tomorrow is less than stellar? Could we see a huge sell off in the market?
I don’t know the answers, but I suspect until the key economic indicators stabilize, the market will continue its volatility, and it does not appear that those indicators will stabilize any time soon. Employment, housing, consumer spending, and consumer confidence all are shaky, at best.
Now, having said this, something could happen to spark a turnaround, and that is that corporate America spends some of the $1.8 trillion in cash it has sitting on the books. Currently, the financial wisdom says that money is sitting there unspent because business is uncertain about the economy, but here is the irony of that thinking – business is the economy. Think about this. The Economic Recovery Act (stimulus) totaled $790 billion. Arguably, it worked to the degree that we are not in a depression now. In fact, one could argue it is the reason business has $1.8 trillion in cash on the books. That cash is twice the amount of the stimulus. One can only imagine how the employment picture would change if optimism replaced fear and business began spending that money on, well, building business. Wow, what a stimulus that would be!
At some point, that money will come back into the economy. At some point, business will have to spend that money because that is what business does – it takes spending money to make money. And this is the reason I suspect we will not see a market dive to points not seen in over a year. At some point in the near future, the key economic indicators will stabilize because business will have figured out that the only way out of all of this is for business to open the purse strings and get that cash back into the system.
Trade in the day; invest in your life …
