Tuesday, April 19, 2011

S&P Warns, Bond Market Yawns


The stock market was rocked yesterday, and prices generally moved sharply lower.

Most news stories are citing the move by Standard & Poor's to put the credit quality of the United States on "negative" credit watch.

To be honest, I'm not exactly sure what the move by S&P means. How can the credit quality of an entity that can print money to pay off its debt move lower?

It would appear that the bond market shares my sanguine views. Treasury bond yields moved slightly lower. The 10-year Treasury note now yields 3.38%, or almost 40 basis points lower than two months ago (take that, Bill Gross!).

In any event, most investors remain very skittish about investing in anything, particularly stocks.

Most can lay out the bear case for stocks pretty well. Poor economic fundamentals in key sectors like housing and employment are felt by most of us. The highly partisan budget battles in Washington over relatively trivial savings make real fiscal reform seem unlikely. Memories of the horrific bear market in 2008 remain fresh in most investors' minds.

And yet stocks continue to move higher, yesterday notwithstanding. The S&P 500 is up over+11% in the last six months. While we are still only partly through reporting season, corporate earnings remain good.

Last Sunday's New York Times carried a good column by Jeff Sommer discussing the huge "wall of worry" that stocks have been climbing. What was particularly interesting about the column was that it contrasted the views of two former Merrill Lynch analysts, Rich Bernstein and David Rosenberg.

Here's an excerpt:

The stock market’s 80 percent rise since March 2009 has been one of the greatest bull runs in history, {Bernstein} says, and while the American economy has its problems, it is clearly strengthening and corporate profits are rising. Yet anxiety about the American market is profound, he says, and many investors have been avoiding American stocks, pouring money into emerging market stocks and bonds instead. That makes no sense to Mr. Bernstein, a longtime bear who turned resolutely bullish in July 2009.

“It seems no one wants to believe in the stock market in the United States,” he said. “People don’t accept that the American economy may actually be strengthening. And they go for emerging markets, which are wildly overpriced. What in the world is going on here?”

The Wall of Worry Has Never Looked So High - NYTimes.com

To me, I think you have to stay in stocks until the Fed turns off the liquidity tap. True, days like yesterday are no fun, but it seems to me that the trend for the general market remains higher.