The rules of the game do change so who knows what will happen next. Is it reassuring that even the 'experts' dont agree?
Scary Season
December 12, 2005
Fear and greed are supposed to be what drive the stock market, but as the year finishes up, it often seems like fear and more fear.
In addition to investors' usual fear that the market will fall, there's the competing fear that they'll miss out on a year-end rally that sets them behind their peers. Among the many professional investors who are judged on their calendar-year performance, these concerns are particularly acute. Fall behind in the final month of the year, and that fat year-end bonus you expected can go on a crash diet.
Because the past couple of years have seen big year-end rallies, a lot of investors became conditioned to worry more about getting left out of the fun than getting left holding the bag. One factor behind stocks' gains last month may have been that many investors stubbornly clung to their positions for fear of missing out on a big year-end move.
The problem: With so many investors anticipating that stocks will rally through the end of the year, it's hard to figure out who will be the buyers behind the move -- which may be why the market has petered out this month. At the same time, with so much uncertainty about the housing market and the Fed, investors are having a hard time figuring out how they want to position themselves for next year.
Meantime, the year-end game may be happening away from stocks. To wit: Gold is surging like a momentum stock, tacking on $23.70 an ounce last week alone to set a batch of 20-plus-year highs.
Uncertainty Is Certain Next Year
Schism Opens Over Interpreting The Flattening Yield Curve; A Lesson From the Mid-1990s
December 12, 2005
A big reason for the stock market's stall late this year is widespread uncertainty over where it goes next year.
Wall Street strategists are deeply divided, which means just about every possibility has a gaggle of ardent supporters. Some argue that equities will stagnate, others predict a sharp decline, and yet another camp says stocks will soar. And, of course, not everyone can be right.
"This isn't going to play out the way most people expect it to," says Barry Ritholtz, chief market strategist at Maxim Group, a New York broker dealer.
At the heart of the debate is a rift over a commonly used economic-forecasting tool: the difference between yields on long- and short-term Treasurys. That difference is often described as the yield curve because of how it usually looks plotted on a graph.
The spread between short- and long-term yields has been narrowing -- i.e., the yield curve is flattening -- for the past few years as the Federal Reserve has boosted short-term rates while long-term rates have changed little. The Fed is expected tomorrow to increase short-term rates another quarter point, to 4.25%. The yield on the 10-year bond was 4.53% on Friday.
Investors tend to view a flattening yield curve as a precursor to an economic slowdown. The predictive quality of a flattening yield curve isn't foolproof, but it has fundamental underpinnings. Investors generally want to be paid more to lock up their funds for a longer duration. When longer-term yields are roughly the same as shorter-term yields -- a flat yield curve -- that means investors are nervous about the near-term bets and so are demanding relatively more return on them.
