Why Are Stocks Stronger Now?

Quote of the day:
“The best lack all conviction, while the worst are full of passionate intensity.”
--William Butler Yeats

The stock market goes down, the stock market goes up. It’s hard to make sense of it. Many people just give up and don’t worry about it. Others give up and do worry about it.

In reality, there is a bit of logic to the movement of the market.

I guess the clearest part of things is why stocks were down early this year. More and more bad economic news was coming out each day.

But why are they stronger now? There has been no letup in the stream of negative news. Two reasons.

One is the release last week of bad unemployment numbers. This is usually interpreted as an indication we’re much closer to the end of a recession than the beginning. Investors are always trying to see what will be happening in six to nine months. In this case, they looked out and saw the probability of a stronger economy then than now.

The other reason is much more basic, and usually ignored in financial reporting. It’s the Al Pacino/Godfather 3 effect. The money goes out, and it has to come back in.

Realizing this has really helped me over the years. When the stock market goes down--and especially when it goes down sharply--I ask myself where that money is going. Is it permanently going into another kind of investment? In most instances, no.

Instead, the money is put into treasury securities--like this time--or other short-term low-risk low-return investments. In other words, the money is “parked,” waiting to come back in. It may take a few days, a few months, even a year or two, but the money will come back.

Where does the money wind up? It always winds up where investors think they will get the highest return. It doesn’t stay parked.

A lot of money came out of the market and into short-term treasuries over the last three months. Does it makes sense to think that investors are going to be perfectly satisfied watching that money earn 2% or less? Not for long.