Friday, October 2, 2009

Climbing walls of worry



I think the latest setback in the market is just one more case of jitters. The VIX has picked up, and credit spreads have widened a bit. The market worries that something might go wrong after such a huge rally. Is the market overextended? Are markets too optimistic? Will the economy hit another downturn? All of these concerns fall into the category of "climbing walls of worry," which is what happens after such a devastating market as we had earlier this year and things begin to recover.

I don't seen any deterioration in the fundamentals of the economy. Money is abundant. Commodity prices are still trending higher. Credit spreads are trending lower. Global trade is rebounding. Confidence is returning. Job losses are slowing.

I think we'll see the equity market continue to move higher, in fits and starts, for some time to come.

5 comments:

DaleW said...

The CRB raw industrials index has suffered some major damage. That is a bit of a worry for any materials-related and transport I cover. I'm fine with zero inflation in the staples I cover. In discretionary, I'd prefer a little more inflation than a little less.

Scott Grannis said...

Whoa, hold on there. The CRB Industrial index is off only 5% from its recent high. That's major damage? Or are you referring to it being off about 18% from its all-time high in early 2008? That's not very serious either, in my book, considering the index today is about double what it was at its 2001 low.

DaleW said...

Scott,
It below right through the 20-day MA, stopped at the 50-day, and then plunged trough that in dollar terms and in terms of any currency one wants to choose.

I am less concerned about where it is relative to 2001 because any materials-related equity is trading at 3-10 times where it was in 2001. I am less concerned about the 2008 high because margins have held up for materials-related companies pretty well despite a bad recession. I am concerned about what happens on the margin, because that's where expectations are set and that's where securities prices are set. Any technical breakdown of the CRB RIND makes me very nervous about my materials-related companies and I would call a this move a technical breakdown.

Bill said...

Scott,

So what's to stop the wall of worry from pushing us back into recession in 2010 if the majority of pundits convince Americans to stop spending? Isn't that what Dr. Doom Roubini is predicting?

Scott Grannis said...

I suppose it's possible the the Wall of Worry could suddenly get higher if something unexpectedly bad came out of Washington or if Iran exploded a nuke somewhere. But in the meantime, everything I see points to the market continuing to scale those walls of worry. Confidence rises. Spreads contract. Liquidity improves. Prices of commodities rise. The Fed is dangling untold sums of money in front of everyone's eyes with a zero interest rate attached. People are gradually stepping up and borrowing that money in order to buy risky assets again. Money that was stuffed under mattresses is being spent again. Nominal GDP (economic activity) is rising. Cash flows are rising. It's all a big positive-reinforcement machine. To stop this would require some really scary stuff.