Bandwagoning Investors May Be In for Jolt
As Wall Street-White House honeymoons go, this one has been warmer and cuddlier than just about anyone might have hoped back in October. But it’s beginning to look like both parties have emptied too many bottles of Korbel.
Everything President Clinton says seems to be OK with the stock and bond markets, because stock prices just keep going up while interest rates keep falling. New taxes? Great! Shift more Treasury borrowing to shorter-term securities? Sounds good. Oh, and is it all right if the federal deficit still soars this year? Of course it is!
Forget about attacking Clinton for his many and varied stances. He’s entitled to take his time developing his programs. The problem isn’t the President--it’s the markets. We’re now clearly in the bandwagoning stage, where many amateur and pro investors alike are buying stocks and bonds just because, uh, it seems like the thing to do.
Put it this way: People have been acting as if interest rates will never bump up again, even temporarily, and that stock prices will never be cheaper. But with so much that can go awry over the next few months--in the White House, the economy and the world--does it sound even remotely possible that you won’t get better buying opportunities than now?
Actually, we know why investors feel so compelled to buy. There’s a mountain of cash out there, built up in the 1980s--$3.3 trillion, in fact, in such short-term investments as money market mutual funds, bank CDs, savings deposits and short-term Treasury securities. And because most of that money is earning somewhere south of 4.5% a year, it’s understandable that the owners are out looking for higher returns in stocks and bonds.
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The people doing the shifting aren’t just small investors. David Rosenberg, manager of the Delaware Group’s intermediate-term government bond mutual fund in Philadelphia, figures that 30% of the $660 million in new money he pulled in last year came from corporate treasurers trying to earn a few more bucks on their idle cash. Given a choice of 3% in money funds or 6%-plus in Rosenberg’s fund--which owns bonds maturing in three years, on average--there isn’t much of a contest.
So what’s the big deal, especially considering that this cash-to-stocks-and-bonds shift has been ongoing for two years? The issue now is timing, and picking stocks and bonds carefully rather than assuming that anything is better than cash.
For example, long-term Treasury bond yields have fallen to six-year lows this week--to around 7.25% on 30-year bonds--on the belief that the Clinton camp is serious about paring the federal deficit. It’s expected that part of their strategy will be to have the Treasury borrow less money at longer terms and more at shorter terms, thus saving on interest. Sounds good for 30-year bonds.
But it’s a mystery why investors continue to buy shorter-term Treasury securities with abandon. The yield on the five-year T-note has dropped from 6.04% at year’s end to 5.75% now, even though the new supply of those notes could be huge in coming months--a recipe for higher yields.
What’s more, Robert Barbera, economist at Shearson Lehman Bros. in New York, believes that current low shorter-term interest rates in general belie the strength of the recovery. “If we’re right on the economy, then we’re in a bit of a fool’s paradise on short-term rates,” he says.
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The same could be said of the stock market as a whole. Will a better economy be good for stocks? Yes. But are many individual issues worth the high prices investors are paying? Doubtful.
Back to the timing issue: Bandwagon money wants in right now in a big way, simply because the stock and bond markets have been hot since October. In the longer-term, bandwagon money from that mountain of cash will probably keep stocks up and interest rates under control through the rest of this year, maybe well into 1994.
But sometime in the next few months the honeymoon is going to end, and a vicious round of profit-taking in stocks and bonds will ensue. That’s when you’ll want to buy. Patience is always a virtue, and never more so than at times when most investors can’t abide it.
