For millions of Americans, watching and waiting is the new day-trading-and the trillion-dollar question is when they’ll feel fully comfortable investing in stocks again. In the U.S. alone, investors still have nearly $900 billion parked on the sidelines, according to Thomson Reuters. The tide finally began to shift this spring, when an upward bounce in the markets and upbeat forecasts from luminaries like Federal Reserve Chairman Ben Bernanke helped lure some investors out of hiding. Financial advisers say they’re seeing a surge of inquiries from clients about stocks. “It’s about 15 to 1 in terms of calls from people who want in versus out,” says Tom Hepner of Ruggie Wealth Management. And sentiment among fund managers recently shifted from “apocalyptically bearish to reluctantly bullish,” according to a survey by Banc of America Securities-Merrill Lynch.
The key word, though, is “reluctantly.” The recent rallies have eased some investors’ fears, but it will take a lot more prodding for others to get over the crash of 2008. Although the pros know that historically, stocks recover long before the rest of the economy, nobody wants to suffer more losses by getting in too early. Or, for that matter, too late: Some who missed out on this spring’s stock gains now fear that the market has no more gas in the tank. Misgivings like these explain why pros and amateurs alike obsess over their favorite economic indicators-from “TED spreads” (it’s a bond thing) to taxi-line wait times – trying to decide if the glimmers of improvement can translate into a lasting recovery.
With that in mind, we polled a slew of economists, managers and strategists to find out which signals will give them confidence that the worst is truly behind us. No single one of these indicators is a surefire green light. While any number of statistics-like weekly unemployment claims and surveys of sentiment among manufacturers-have helped to signal rebounds from the 10 recessions since World War II, few have hit the mark each time. TD Ameritrade Chief Investment Strategist Stephanie Giroux says that before she utters the words “a new bull market,” she needs to see “clear evidence on multiple fronts that the economy is starting to grow again.” For investors still smarting from last fall, waiting for multiple “go” signs has an appealing logic. Before they feel confident about the stock market’s risks, they want to feel like the other elements of their economic lives are secure.)
BORROWING AND LENDING
Bonds never get much respect from the public and the media, even though, at $25 trillion, the American bond market dwarfs the value of all U.S. stocks combined. The pros know better – in fact, they see bonds as the canary in the economic coal mine. The bond market basically represents a huge chunk of the money that gets borrowed by governments, businesses and consumers. When a company like General Electric needs to raise money, for example, it sells bonds to everyone from hedge funds to banks to ordinary Joes. When the economy gets shaky, bond buyers get nervous; they demand higher interest rates, and some borrowers can’t raise money at all, in what we’ve all painfully come to know as a credit crunch. And all this happens long before stocks or the broader economy hit the skids. In the most recent crash, some of these credit signals started flashing red as early as the summer of 2007, even though the Dow was climbing toward a record high at the time.
Since lending, as some economists say, is the “mother’s milk” of the economy, the pros are obsessively watching the bond markets for any hint that these problems have thawed. It’s a good sign if companies can sell new bonds-what bankers call “issuance.” Last fall corporate issuance ground to a halt, says Kevin Flanagan, fixed-income specialist for Morgan Stanley Global Wealth Management. But things have started to move again this year, as Xerox, Pfizer and other companies have brought out new bonds.
Many smaller business loans don’t involve the public bond market, so investors also watch the Federal Reserve’s Loan Officer Survey, which tracks loans for plants and equipment. Commodity-related stocks tend to move upward about nine months after bank lending improves, says Citigroup Chief Investment Strategist Tobias Levkovich. But any movement on any of these fronts suggests that businesses can get the money to expand and hire-the kind of turnaround the economy and stock investors are desperate for.
Lower interest rates are supposed to encourage borrowing. But low rates alone hardly guarantee a rebound-after all, many U.S. rates have been near record lows for months now. Instead, market watchers pay attention to “spreads,” the differences between the interest on supersafe Treasury bills and the rates on other kinds of loans. The most closely watched ones include spreads based on corporate bonds, as well as the “TED spread,” which compares Treasurys with the rates banks charge each other. Most such spreads drastically widened last year and are still unusually high; the pros will feel more confident about investing when they get narrower.
WHAT TO WATCH: The “TED spread.” It recently fell to around 50 basis points, close to its historical average-an encouraging sign.
WHERE TO GET IT: Many financial-news sites, including Bloomberg.com and TEDspread.com.
2009 Copyright The New York Times Syndicate