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'Mostly bleak' is an improvement for investors

February 14, 2009|TOM PETRUNO

We've reached a point in the global recession where things no longer look universally bleak.

Maybe just mostly bleak -- but that still counts as an improvement to some investors who are getting restless sitting on markets' sidelines.

They're particularly restless in the People's Republic of China, which boasts the world's hottest stock markets in 2009. The Shanghai composite index jumped 6.4% this week, boosting its year-to-date gain to 27.5%, as Chinese investors continued to bet that their government's $590-billion economic-stimulus spending would pack some real punch.

That's the kind of faith that President Obama and congressional Democrats have yet to engender with their $787-billion stimulus program. Despite the plan's advance in Congress this week -- or, the GOP might say, because of the plan's advance -- Wall Street lost ground for the fifth week in the last six.

If case you aren't brave enough to check your 401(k), the Standard & Poor's 500 index slid 4.8% this week, and is down 8.5% for the year.

But that year-to-date decline is a tiny improvement from Jan. 31, when the S&P was down 8.6%.

In fact, the U.S. stock market has mostly just been treading water since mid-January, despite the relentless tide of grim economic statistics, mounting layoffs and awful corporate earnings reports.

That, too, has to count as a positive, relatively speaking. When stocks stop going down in the face of bad news, it suggests that investors believe share prices already reflect the worst of what's on the near-term horizon.

Political battles over the stimulus bill aside, the market doesn't much care what ends this recession. It just wants to feel certain that the end is out there -- and not too far out there. It's an article of faith that stocks will turn up well before the economy itself does.

Some investors aren't waiting. Technology stocks, a classic hunting ground for the growth-oriented, have shown the most resilience of any broad industry sector this year.

The 469-stock Nasdaq computer-sector index is up 2.6% since Dec. 31, bucking the trend of mostly red ink for the broad market indexes.

Within the Nasdaq index, Google Inc. is up 16% this year, Check Point Software Technologies has jumped 22% and chip maker Linear Technology Corp. has gained 10.5%.

Technology-stock mutual funds are up 2.3% this year, on average, compared with a 5.6% decline on average for stock funds overall.

Some investors also have been braving the diciest corners of the bond market. A total of 15 U.S. companies have been able to raise $7.2 billion issuing junk bonds this year, according to Dealogic Inc. That compares with just three deals worth $1.3 billion in all of the fourth quarter -- when the credit crunch was at its worst.

Buyers are stepping up for new junk issues even though defaults are rising on existing junk securities, as more heavily indebted companies fall victim to the ravages of the recession.

Individual investors continue to show a strong preference for bonds of all kinds over stocks, based on the flows of cash into mutual funds.

Bond mutual funds have taken in a net $20 billion in cash this year, compared with a net inflow of $3.2 billion for domestic and foreign stock funds, Investment Company Institute data show.

With the banking system still a wreck and awaiting the White House's next idea for a permanent fix, companies' ability to raise money via bonds is helping to further thaw the credit-market freeze.

What's more, small investors' hunger for bonds is another sign that the fear level in the markets is receding. If you're petrified about the future, chances are you're going to keep your cash only in what you believe to be the safest places -- the bank, money market accounts or maybe your mattress.

Bonds are a logical first step for investors who want to take more risk for a higher return but remain wary of equities.

To be sure, the positive signs emanating from the markets all could vanish quickly if the decline in the global economy were to accelerate.

For now, "The best you can say is that things aren't getting worse at a faster pace," said Ethan Harris, an economist at Barclays Capital in New York.

The continuing rally in gold this year -- the metal rose to nearly $950 an ounce this week, its highest since July -- tells us that some investors feel comfortable only in the ancient refuge of hard money.

Gold's taunt to risk-takers in stocks and bonds might be, "The rest of you don't have a clue how bad things are going to get."

And given that the stock and bond markets last summer obviously had no idea of the calamity that awaited in the fall, it's understandable if many investors fear the recent encouraging signs are just a head fake.

But the markets always play a critical role in lifting an economy out of recession, Harris notes. Optimism usually begins with investors sensing that the worst has passed, and that a recovery of some magnitude is coming.

That optimism feeds into the economy itself, encouraging companies to start planning for better times rather than hunker down further. The markets then respond to signs of hope from businesses, such as decisions to spend on hiring or capital improvements.

Economists refer to this as the "virtuous cycle."

It may be too early to believe that we're there yet, but it's worth remembering how the cycle works. When the time comes, the message from the markets will be the one you want to hear.


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