I just wanted to post a quick comment on the market’s volatility of the past few weeks and the last couple of days specifically. I’ve written pretty extensively for Horsesmouth and for Marketwatch. I should be posting those articles here on the blog next week.
Simply put the markets are in a tither over Ben Bernanke’s speech where he stated that the Fed was looking to slow or “taper” the purchase of mortgage securities from banks, or QE III. The assumption being that any taper would cause interest rates to rise. So money that has gone into investments, solely because of low interest rates, is reversing.
Normally this is just the ebb and flow of the market. However, with near zero interest rates, institutions, primarily the hedge fund world have borrowed money to buy higher interest securities. With large purchases focusing on dividend paying stocks and higher yielding corporate bonds. So what we are seeing is massive selling of securities that were bought with leverage (borrowed money) as these positions make little sense in an environment of rising rates.
The most unfortunate consequence has been that many of the “safer investments” have been hit the hardest – like utility stocks and real estate (REITS).
The positive is that these losses over the last few days are purely market driven. Nothing has happened to actually change the underlying fundamentals of most stocks. Yes we need to adjust to a ‘normal” interest rate world without Fed intervention, but I think that is still a long way off. The economy is just not strong enough to see a significant rise in rates from current levels. I’m looking for a pretty sideways market from here through summer. While the market will gyrate with ever economic data point, the real news will be in September and October when we start seeing corporate earnings for the third quarter of this year. Wall St. is still looking for a significant increase in GDP, and earnings as we go into 2014.