George Brooks: Financial Institutions Have Cash to Work But Still Nowhere Else to Put It

George Brooks |

Brooksie’s Daily Stock Market Blog: An edge before the market opens.

Monday, April 4, 2011 9:24 am EDT

DJIA: 12,376.72
S&P 500: 1332.41
Nasdaq Composite: 2789.60
Russell 2000: 846.77

The stock markets have NOT been sensitive to news in recent weeks, which is fortunate because there has been news out of the Mid-East, Japan and Europe that would normally stop the market in its tracks.

Add to that, the fact Goldman Sachs has reduced Q1 GDP estimates to an annual rate of 2.5% from 3.5%, concerns about inflation have been on the rise, and the stock market has jumped 7% in less than three weeks and at least a stall would be justified.

The economy is on the mend, no question about that. While the initial shock of rising interest rates stands to whack the stock market temporarily when it happens this year, bull markets can live along side of rising interest rates as long as the Fed isn’t trying to halt a surging economy.

What’s more, think of the boost to the economy if money market accounts and comparables finally earned a decent return. What a quandary for those who cannot afford the risk of investing in the stock market, or in buying high-yield bonds which will get decimated in value once interest rates rise.

The 2007-2009 bear market was a cruncher, wait for the bear market in bonds when interest rates take off.

Why isn’t the market more news sensitive ?

Institutions have so much cash to put to work. While I have mentioned this repeatedly as justification for this bull market pressing higher and higher, it is necessary to repeat this phenom from time to time, as well as the fact sellers of stock have no alternative but to reinvest in stocks, ergo no change in the potential for buying out there, it just has to be done at higher and higher prices.

RISK ?

Absolutely, especially if an investor chases a stock that has already had a big run.

However, while bull markets climb a wall of worry coming out of a bear market bottom, they also tend to feed on themselves as bits and pieces of good news creep into the headlines and fear of owning stocks turns to fear of NOT owning stocks.

At less than 14 times earnings (vs a 10-year average), the S&P500 is reasonably priced. Looking out a year, that ratio stands to be even lower, if stock prices don’t move up from here.

They will. Not in a straight line, but IMHO, I think we can see new all-time highs some time in Q4.

George Brooks
sensiblesleuth@gmail.com

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