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player ready...Investors who have added bonds to their portfolios in recent years probably know the mantra of the bond market: Bad news is good news.
Bonds tend to rally as evidence of economic weakness expands. But, in a twist, the incantation could represent the best chance for a traditional year-end rally in stocks.
Normally, December is an upbeat month for equity investors. Investors who sold their losing stocks for income tax purposes should be back, looking for bargains. Others should be climbing aboard in hope of the typical January rally.
This year has been different. After a disappointing November, stocks in December have tried to stabilize, but have not perked up. The principal index of stock market volatility, tracked at the Chicago Board Options Exchange, has relaxed. But the Dow Jones industrial average is off 139 points in December.
Investors rightly are searching for the bottom of the housing market woes. Will losses from lax and abusive mortgage lending be $200 billion? $400 billion? When will the U.S. housing market stabilize? When will indicators of house prices stop falling? It’s like the child’s complaint from the back seat of the car: Are we there yet?
Since late summer the greatest threat to investors has been the notion that central bankers and other government officials have information about the subprime mortgage mess that is much worse than they have disclosed to the rest of us — a supposed conspiracy of silence at the highest levels.
Amid such mysteries and doubts, however absurd, each new disclosure and proposed cure reveals useful information and investment opportunities.
More disclosures, even vague and controversial statements, are beginning to attract what the U.S. stock market needs most: risk-takers.
On Tuesday Goldman Sachs, one of the craftier investment banking giants on Wall Street, posted better-than-expected fourth-quarter profits and record results for the full year, despite current credit market conditions.
However, Goldman’s chief financial officer, David Viniar, issued a cautious outlook, suggesting troubles still lie ahead.
Goldman stock immediately sank, closing down $7.12, or 3.4 percent, at $201.51. Financial-services stocks generally closed lower, in sympathy with Goldman.
But banking stocks, as their plight slowly clarifies, did not lead the broad market lower Tuesday. Major U.S. stock indexes posted modest gains.
A different effect has been evident in home building stocks. A Standard & Poor’s index comprising five major home builders is up nearly 10 percent so far in December, despite no letup in the downbeat forecasts for U.S. housing.
On Tuesday the Commerce Department reported that housing starts fell nearly 4 percent last month, to a 16-year low. The S&P index of home builder stocks inched higher.
Fewer housing starts are bad news for construction workers, local governments dependent on real estate taxes and the short-term revenue outlooks for home building firms.
But the housing problem is unlikely to end until the inventory of unsold homes at least stabilizes. In other words, bad news is good news.
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