Investors square shoulders and buy
Confidence has been sorely missing on Wall Street all year, but the key ingredient that gives investors the courage to buy stocks is showing signs of a comeback.
Indeed, investors' willingness to look past bad news was on display Tuesday. Oil prices topped $100 a barrel, a new record. A reading on consumer confidence hit a five-year low. Prices at the producer level rose. There was more dismal news on home prices. And shares of Internet search engine Google sold off again.
Despite all the gloomy headlines, the Dow Jones industrial average jumped 114.70 points to 12,684.92, trimming its 2008 loss to 4.4 percent.
The market's ability to rise in the face of dismal news suggests some investors may be betting that most of the bad news is baked into stock prices, and the future isn't likely to dramatically worsen. "Any news is good news now because everyone expects the worst," says Jack Ablin of Harris Private Bank.
Stocks are also being driven by subtle but powerful confidence-boosters, including:
- Rising odds of a bond insurer fix. Wall Street has been fearing a ratings downgrade of financially strapped bond insurers, which would cause the credit crunch to intensify and result in more losses for banks. But those fears have eased, at least for now.
This week, two leading credit rating agencies reiterated the "AAA" status of MBIA, the nation's largest bond insurer. MBIA's CEO Joseph Brown also issued a statement Tuesday that reassured investors that the firm has ample "claims-paying resources."
Ambac, the second-biggest bond insurer, also had its top rating reaffirmed Monday by Standard & Poor's. S&P also said if Ambac is successful in raising more than $2 billion in new capital from banks and other investors, it will have enough cash on hand to offset its current capital shortfall. "The fact that you have guys on the sidelines willing to bail these guys out is a positive, and a sign we won't see an implosion scenario," says Kevin McCloskey, senior portfolio manager at Federated Investors.
- Strong stock buybacks. IBM announced plans to buy $15 billion of its own stock. Allstate will buy back $2 billion. It's part of a trend that suggests to investors that these companies see value in their shares.
- Better market action on bad news. It's hard for investors to feel better about stocks when they keep sinking. But since late Friday, when the Dow erased a 130-point intraday loss in the last 30 minutes of trading, the blue-chip gauge has rallied nearly 530 points, or 4.4 percent. "The market has been dealt bad news, takes it in and turns around," says Quincy Krosby, chief investment officer at The Hartford.
Not all investors trust the rally, including Oliver Wiener, trader at BTIG. He thinks stocks are being boosted by investors reversing bearish bets on stocks.
But Jim Paulsen of Wells Capital Management is encouraged that investors are no longer easily spooked. "You can only stay in a state of sheer panic for so long," he says.
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