Sunday, June 3, 2012

Falling Investor Confidence

With the end of the month finalizes the DOW's worst May since 1940, dropping almost 8%.  With worries in Europe turning toward Spain recently, market volatility has increased.  Facebook's IPO disaster recently also helped reinforce investor fears in risky assets leading to more risk aversion and avoidance of stocks altogether.

Facebook's IPO was botched after adjustments were made to increase the volume of shares offered as well as the price.  After opening around $38 (rather than the original $24-$28 range) two weeks ago, the stock is now trading for around $28 or about 26% less.  There has also been a lot of criticism about asymmetric information and delay in trading during the day of the IPO.  This has hurt investor confidence since many people were expecting Facebook to be a big hit and it wasn't.

The individual investor has been pulling out of and staying out of the stock market the past few years.  Many people probably also made the mistake of staying out until the most recent rally and got in at a high point before the market fell again this past month.  On the other hand, bonds have been doing extraordinarily well as more and more people move into a higher allocation of fixed-income.  The 10-year treasury's yield has recently sunk below 1.5% as people focus more on getting a return of their principal rather than a return on their investments.

Looking at such low interest rates, however, makes it difficult to argue that putting money into fixed income is a good idea, especially if rates will have to eventually go back up.  Locking in your money at 1.5% for 10 years doesn't seem to be very worthwhile.  And interest rates at savings accounts are practically zero.  It seems like if you want any return at all you need to look at stocks and the valuations right now make them seem very attractive.  Will the market continue to drop in the short-term?  It is quite likely, but as other investors struggle to regain their confidence, there is a lot of money to be had to buy their fear.  I might not go into the market right now, but rather keep an eye out over the next two months as prices start to stabilize again.  To prevent misjudgments in timing, making a consistent size investment each month can help smooth out swings in prices.

I also wanted to mention that I will be working for the next 10 weeks and may not post as regularly.  I will try to keep up my once a week schedule but there may be one or two missed weeks depending on how busy I am so I thought I'd give a heads up.

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