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Conspicuous consumption is about as welcome in 2009 America as a houseguest straight from a Mexican vacation. Frugality is in. Americans are returning bottles for the deposit instead of sipping Grey Goose on the rocks and after decades of spending more than we earn, we are actually saving more than we are spending.
We applaud this newfound American penny-pincher but think, to a certain extent he is short lived.
Both stock and bond markets are sensing an improving economy and acting accordingly. Yields on ten-year U.S. Treasury Notes have risen dramatically over the past two months. These notes, that at one point in time over the past year yielded less than two percent, have now climbed more than fifty percent to yield north of three percent. Up until recently, U.S. Treasury bills, notes and bonds, an appealing investment for the risk-adverse, had been in strong demand. However, given the much talked-about “green shoots” of perhaps signaling a turnaround in the economy, investors have begun to look at other investments either within the fixed income area or back into equities. This reallocation of assets has reduced demand for treasuries, at a time when additional supply in order to service the ballooning U.S. budget deficit has come on to the market, a combination that has sent yields higher, as noted above.
A further indicator that, at least temporarily, things are looking up is the nearly thirty percent rally in the U.S. stock market. After an abysmal start to 2009, stocks are basically flat for the year.
Regular readers of our column will note that we nearly always proponents of investors striking a balance between risk and safety. We continually talk about taking measured moves, thinking long-term and not getting caught up in the emotions of the investment world. Now is no different. At the current time, our research indicates that the small, retail investor is underinvested in the riskier areas of the market. He is clinging to money markets, cash and Certificates of Deposit, accepting low returns for peace of mind and a perception of safety. These are parking places and not historically an area that will help you achieve your financial objectives.
Ironically, we believe that the gulf has never been wider between what investors are most comfortable doing and what they should be doing.
THE BOTTOM LINE. The stock market has come a long way in a short time so investors should be careful “taking the plunge” in a wholesale fashion. Use pullbacks of more than ten percent to add to mutual funds or individual securities. That said, many opportunities abound for investors with a two or five year horizon. Although possibly quite modestly, we believe that the American economy is getting ready to grow again, perhaps as early as the third quarter of this year. Prior to this, the stock market will move, as it generally anticipates changes in the direction of the economy by six to nine months. After that perhaps, we can say goodbye to the “frugal” American. Candidly, it was no fun while it lasted.