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Looking for Trouble? Why are Investors so Jittery?


The “animal spirits” seem to be alive and well in American shareholders today. “Like a mob of meerkats alert to any approaching danger, investors in American shares take fright easily these days.” So the question is why are they nervous and is it justified?
Four set of statistics for March suggest that the economy is losing momentum and the economy is heading in an unhappy direction of high inflation and lower growth. Worrisome is the extremely bad inflation data: consumer prices rose by 0.6% in March and the core index rose by 0.4% (which excludes gas prices). This follows the 3.3% core inflation rate in the first three months of the year, which is above the Federal Reserves comfort zone. However, the most important thing to remember is that these statistics add to the fear in investors and consumer. With prices rising by 65% in the U.S. since 1997 household debt has also risen along with consumption. However, in the University of Michigan’s April consumer index there was a drop of 4 points to 88.7. Also the S&P 500 share index dropped closing at 1,137.5, 4.2% lower than on April 12th, which is 6.1% lower than at the start of the year.
However, amid these disappointing numbers and bad earnings by such companies as Coca-Cola and GM, forecasts of growth in corporate profits in 2005 have increased since the begging of the year. Thus, not reflecting the investors’ sentiments. Yet, investors are still scared. In March 11% more believed that economic growth would increase rather than decrease. In April, however, 20% more thought that growth would fall rather than rise.
So why are they scared? Why the change of heart? One answer, according to Rochdale Research, is that good balance sheets by companies have been at the expense of investment. That is, they have under invested in their operations and have done little to generate future growth. However, as the stock market rises and falls both in the U.S. and abroad, there are ultimately no substantial explanation and it is left “in the eye if the beholder”. This article was found on The Economist online at http://www.economist.com/finance/cfm?Story_ID=3893763