In complex adaptive systems like modern financial markets, a change the price of any one market has ...
Are we afraid enough yet?
08/22/2011 1:30 pm EST
Those of us trying to keep our powder dry until we’re near to the bottom—acknowledging that we’re not going to catch THE bottom—are asking, When is the fear intense enough?
It certainly got very intense last week. The yield on a two-year Treasury note fell to 0.19%. The 10-year Treasury closed the week at 2.06%. That was slightly above the 1.97% low set on Thursday, which itself was the lowest level since 1950.
And that for the bonds of a country downgraded from AAA to AA by Standard and Poor’s. But the Treasury market is incredibly deep and liquid and big investors know they can get in and out without roiling prices.
Nobody wants to buy equities—at least until what I’m calling the Jackson Hole bounce today. The dividend yield on the S&P 500 sits at 2.25% as of Fridays close—that’s the first time since 2008 that the stocks in this index has paid more than the 10-year Treasury.
The S&P 500 now trades at a price-to-earnings ratio of 12.5—that’s down from 15 at the end of 2010. But U.S. stocks are at giddy heights compared to their European counterparts in the Stoxx 600, which now sell at 10.3 times earnings. That’s down from 13.3 times earnings at the end of 2010.
Developing markets aren’t faring any better. The S&P 500 fell by 1.5% on Friday but Hong Kong’s Hang Seng fell 3.1%. Markets from Shanghai to Sao Paulo are either in bear markets or close to them.
This rout has cut $6 trillion from the value of global equities in the last month.
But the market still doesn't strike me as scared and pessimistic enough. I hear talk too much talk from individual investors and from Wall Street about the opportunity to pick up bargains. At a bottom, nobody is taking like that. I think we need one more rally and then another rout to smash hope even further.
The hardest thing to figure out right now, though, is the scale of this downturn. Should I be looking for a bounce in the next few days, followed by a rout in September and then a rally to end the year that ushers in a new upward trending market? Or should I be looking at a larger scale and thinking that a buying opportunity in the fall on the low that is followed by an end of the year rally is just the set up for a decline in 2012 that I the hope-crushing turn that results in a real bottom in 2012.
At this point I don’t know. Really. I’m inclined to hedge my bets by buying high dividend stocks with solid cash flows whenever we reach what looks like a bottom this fall. That way I still get paid—and quite handsomely too—if an end of the year rally turns into another disappointment.
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