Markets buckle under the weight of discouraging economic news
July 14, 2011
Almost by definition, investors are optimists. This has been demonstrated again this year, as the stock market has tried to rise on the strength of even the shakiest signs of economic progress, only to have its hopes dashed on multiple occasions. Bond yields have somewhat tracked the progress of the stock market, so interest rates have ridden a similar roller-coaster.
The reason for the sharp ups-and-downs of stock prices and bond yields is that as much as people like to talk about rational markets, the truth is that in the short term markets tend to swing between extremes of positive and negative thinking. Unfortunately, the latest turn has been towards the negative.
The latest turn
Three times this year, the stock market has tried to mount a sustained rally, and three times it has slipped backward again. The latest downward turn started just last Friday, July 8th. The market was already under the cloud of the European debt crisis and unproductive budget negotiations here in the U.S. Then, an extremely disappointing jobs report was the straw that broke the camel's back. The stock market rally collapsed under the collective weight of these pressures.
Bond yields have followed a similar course, with yields rising on economic optimism and falling on pessimism. As with stocks, the latest turn in bond yields has been downward. Unlike stocks, the overall direction for bond yields this year has been downward as well. In other words, even excluding the short-term mood swings, the outlook for higher interest rates seems to be worsening.
Savings accounts on the sidelines
For people with savings accounts, money market accounts, or CDs, watching these events unfold is a little like sitting on the sidelines at a sporting event. You are powerless to influence the action, and you aren't even directly affected by it. Even so, you have a strong rooting interest.
After all, a rising stock market and especially rising bond yields could eventually influence CD, savings, and money market rates to move higher. In order for this to happen, though, market optimism needs to be backed up with hard economic evidence.