The Stock Market: What Goes Out Comes Back In

Quote of the day:
“I do not see any real signs of recession, despite all the news headlines, which I believe many journalists are overplaying in order to attract attention. The Cold War is over. Global warming is becoming a bore--at least to this jaded writer. Journalism, which thrives on bad news, needs a new scare. Why not economic collapse?”
--Jerry Flint, January 3 Forbes

The economy and stock prices have been in the news since the start of the year. There are growing worries of recession, and special concern that consumer spending seems to be slowing.

We may or may not have a recession. We may or may not be in a recession. I don’t know. There are too many variables, and too many of them are only fuzzily known.

I try to stick with what I know. And I try to keep things simple.

When the stock market is weak, I ask myself a question: “Where did the money go?” When investors sold stocks, where did they put the money?

Most of the time it goes into money-market funds or T-Bills. Is the money going to stay there? No. At least not for any length of time.

So where will the money go? If bond yields (interest rates) look good, some or all the money will move into the bond market. This is what happened in 2000 and 2001 when the tech bubble burst. 30-year triple A bonds (highest quality) were yielding almost 8% then.

A lot of that money is still in the bond market, which showed a healthy return for the next few years.

Even though interest rates are declining again, bonds are already at 5%. To deliver the kind of return we saw at the start of the decade, the yield would need to decline to 2.5%. Unless the world is ending, I don’t know who in his right mind would invest in a 2.5% 30-year bond.

I don’t see the bond market delivering much of a long-term return from here. So the money is not going there.

Where else might it go? Some might go into real estate, if institutional or individual investors have the flexibility to invest money there. Most institutions do not have this flexibility. And I think individuals are all too aware of how illiquid real estate is.

The only realistic choice right now is the stock market. The money will come back. Just like Al Pacino said in “Godfather 3” about trying to escape the mafia. They try to take the money out, but it has to go back in.

In the declines and choppiness of the stock market, we’re also seeing the actions of speculators trying to time their sales and purchases. That money is not going permanently somewhere else.

So if the long-term money nor the short-term money is permanently moving out of stocks, will the market head permanently south?

Just asking.