The world isn’t ending? Time to buy stocks
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On Wall Street, fear is so five minutes ago. Hope is once again in vogue.
With the Dow Jones industrial average’s 228.87-point, 1.8% jump today to 12,849.36, the index gained 4.2% for the week. That trimmed its year-to-date decline to 3.1%.
Check your 401(k) account this weekend. You’re likely to be pleasantly surprised.
From its recent low of 11,740 on March 10 -- when the financial system looked like it really might implode -- the Dow is up 9.4%. The gains are similar or better for broader U.S. indexes and many foreign stock indexes.
On the flip side, look what’s happening with U.S. Treasury bond yields: They’re up sharply in recent weeks. Bond yields rise when investors are bailing out of the securities. Wall Street is dumping Treasuries because fear is receding. Many investors no longer feel the need to hide in the relative safety of government debt.
The ‘panic bid’ for Treasuries is going away, says Tom Tucci, head of government-debt trading at RBC Capital Markets in New York.
The best explanation for the markets’ turnabout is the simplest one: the world didn’t end. After the near-collapse of brokerage Bear Stearns Cos. last month, the Federal Reserve took a gamble and opened its lending window wider not just to banks, but to securities firms.
‘The Fed has added liquidity to the financial system in amounts never seen before in history,’ says Bruce Bittles, chief investment strategist at brokerage Robert W. Baird & Co. in Nashville.
The Fed didn’t end the housing crisis, and it may not have forestalled a recession. But it bought more time for the financial system to deal with the mountain of bad mortgage debt that’s still out there.
And now that fear of immediate cataclysm has evaporated, investors have had a chance to reconsider what they should be doing with their money. With better-than-expected first-quarter earnings reports this week from IBM Corp., Google Inc., Caterpillar Inc. and others, it’s not a big surprise that stocks are getting another look.
‘The market is all about sentiment and perception,’ says Marc Pado, U.S. market strategist at brokerage Cantor Fitzgerald.
The sentiment and perception right now is that the future isn’t as scary as it appeared a month ago. Sometimes, that’s all it takes to get people interested in taking some risks again.
Posted April 18, 2008