Fisher Investments Editorial Staff
US Economy

Strong Currents Stirring

By, 02/11/2009

Story Highlights:

  • Stocks fell significantly Tuesday—another volatile day in a volatile period. But the depths of a bear market are controlled by sentiment, not fundamentals.
  • It's no secret fundamentals suffered when credit markets locked last fall. Yet some signs—like Cisco Systems' recent $4 billion bond offering—indicate a recovery in the offing.
  • Though markets aren't back to normal yet, improving credit conditions will help get capital flowing to improve the overall economy.
  • The stock market will discount these developments in advance, moving higher long before the benefits of improved credit conditions are reflected in economic data.

(Editor's Note: MarketMinder does NOT recommend individual securities; the below is simply an example of a broader theme we wish to highlight.)
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Stocks fell significantly Tuesday—another volatile day in a period of extremes—coinciding with the announcement of the Treasury's new financial bailout plan. Another big down day isn't so surprising. The depths of a bear market are typically ruled by sentiment, not fundamentals. And today's predominant sentiment—fear and uncertainty—works on short time scales, like days, weeks, or months. Fundamentals drive market trends over longer periods. (Compare deep ocean currents to superficial surface chop—they're less noticeable but vastly more powerful.)

So today's stock market moves are erratic, but the deeper fundamentals aren't too encouraging either, right? It's no secret the recent financial panic led to a credit market seizure—threatening future economic and stock market strength. Undoubtedly, things have been better. Yet despite prevailing problems, credit markets are beginning to stir. An encouraging sign for businesses and investors alike.

Cisco Systems sold $4 billion worth of corporate bonds Monday, with over twice that much demanded. And Cisco isn't the only big, well-qualified borrower finding a market for its debt. Other non-FDIC backed issues over $4 billion include the likes of ConocoPhillips, AT&T, Verizon Wireless, and Altria Group.

US companies have sold $78.3 billion of non-government backed, investment grade corporate bonds so far in 2009, compared to just $21 billion in Q4 2008. Throw in government-backed debt and a total of $181.7 billion in US corporate bonds had been sold through Monday, 42% more than at this time last year. Yields on high-grade corporate debt are off last fall's highs, and corporate spreads compared to risk-free debt, though still elevated, have fallen too.

And surprising as it may be, successful non-government backed offerings aren't limited to non-Financials companies—Goldman Sachs issued $2 billion at the end of January. Granted, creditors demanded a healthy premium of 5% over risk-free Treasuries (compared to 1.7% in 2007). But Financials couldn't find any willing private investors just months ago.

Credit markets aren't back to business as usual, but we continue to see some notable first steps toward better conditions. Healthier credit markets will help get capital flowing to improve the overall economy. And the stock market will discount these developments in advance, moving higher long before the benefits of improved credit conditions are reflected in economic data.

Challenging as it may be in the short term, investors should do their best to endure the surface swells, favoring deeper currents to firmly guide their progress forward.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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