By John Wasik
CHICAGO Feb 25 Over the past few months, it has
been much easier to make a case that widespread financial
anxiety is easing, although trying to quantify the upsurge can
be like trying to catch a frog. As soon as you grab for it, it
At the beginning of last year, investors were grouchy about
nearly everything and kept putting money into bond funds, while
the stock market slipped. Then numerous economic indicators
started pointing north and sour global financial news became
less prevalent, and the tide turned as money started flowing out
of bonds and into stocks.
As financial anxiety eases, investors feel they can take
more risk and worry less about the worst-case scenario. This is
good news for the overall economic picture in the United States.
While there are sure to be bumps in coming months, the
prevailing trend is for a sluggish recovery in the United States
and abroad and the current stock rally - the S&P 500 index is up
more than 6 percent year to date through Feb. 22 - might
continue to be bolstered by the Fed's easing policy.
For sure, it seems brighter days lie ahead and here is why:
* The tide seems to be turning on the major fears: The euro
zone probably won't collapse, the U.S. is continuing to rebound
and hyperinflation is not around the corner. Meager inflation
and interest rates combined with less global anxiety will give
legs to the current stock rally. It's as if the mass psychology
of pessimism has turned a corner.
* Although the U.S. economy is not adding enough jobs to
fuel a robust recovery, that is still a positive for stocks
since it means the Federal Reserve will keep its quantitative
easing policy in place in some form. Interest rates held at
nearly zero translate into low financing costs for nearly every
While low interest is still a losing game for savers in
search of yields, those willing to take more risk will return to
the stock market and find it there. Just keep in mind that once
the jobless rate reaches 6.5 percent, the Fed might change its
mind and raise rates. But that doesn't appear on anybody's radar
screen at the moment.
* Consumer optimism is also building, although it is more
like a slow dripping faucet than a geyser. According to the
National Association of Business Economists (NABE) outlook
released on Monday, consumer spending is forecast to rise to 2.4
percent next year from just under 2 percent this year.
* Business spending is turning around. Companies spend money
when they sense an improving economic climate. A Thomson Reuters
survey released on Friday found that spending plans by S&P 500
companies are exceeding analyst estimates. That translates into
more capital expenditures and hiring.
* The U.S. real estate market continues to mend. Even more
important in the NABE forecast is its forecast that residential
investment is expected to grow nearly 15 percent over the next
year along with higher home prices and housing starts. That will
stoke the wealth effect as homeowners feel more of a cushion
from real estate and invest more discretionary income in stocks.
* Low inflation - and the diminished expectation of
hyper-inflation - also plays well on Wall Street. One signal
that inflation angst is easing is the price of gold and
investors who trade in it. Money management company PIMCO, the
world's largest bond-fund manager; and leading hedge-fund
managers George Soros and Julian Robertson all reduced their
stakes in the SPDR Gold Shares ETF, the largest
exchange-traded fund that holds pure bullion, according to
All of this signals that these influential investors are
perhaps less worried about the financial climate in the West and
inflation in particular. Since the SPDR ETF is a direct investor
in gold, it is one of my favorite proxy anxiety indexes. When
its price rises, it is a sign of skittishness about economic
health, the dollar's value and inflation. When it drops, it
shows that nervousness is abating.
* Money flowing out of gold probably is not heading into
bond funds. Sanguine investors are more at ease with higher
stock risk premiums. In the past year, the SPDR fund has dropped
nearly 5 percent (through Jan. 30), with losses in the past one
and three months. Its volume on Feb. 20 was more than six times
what it was Nov. 20 of last year, so there a lot of dollars
moving in and out of the fund.
Bullion prices have been steadily falling since last
October. During the same period that gold has been declining in
value, U.S. stocks have been on a steady rise. The SPDR S&P 500
ETF, which tracks the largest American stocks, has
gained 16.5 percent year-to-date through Jan. 30. When investors
are optimistic, that is a sign that overall anxiety has possibly
* Investors are generally upbeat. While overall consumer
confidence is not entirely robust, according to the Conference
Board and Rasmussen Indexes, investors are still favoring the
stock market. A one-year stock confidence index tracked by the
Yale School of Management's International Center for Finance
shows that some 72 percent of individuals and institutions think
the stock market will rise in the coming year.
* Stocks might not be over valued. The CAPE index prepared
by Yale professor Robert Shiller, which shows a "cyclically
adjusted price-earnings" ratio reflecting inflation-adjusted
earnings from the previous decade, indicates an above-average
valuation for stocks, although they are not anywhere near where
they were in 2000, just before the dot-com crash. The CAPE ratio
is currently at 23 and the average is 16.46. In 2000, the index
was at 44, when stocks were incredibly over valued. While stocks
are certainly getting pricier, they do not appear to be
irrationally over valued.
One caveat is what happens with the U.S. budget sequester,
which will trigger some $85 billion in federal spending cuts,
beginning on March 1. If it is not resolved soon, the budget
cuts might roil the U.S. economy and markets.