Wall Street profits from trading volume. And trading volume depends on sparking human emotion. Sadly for Wall Street, fear has left the building and greed has not replaced it.
This means that Wall Street will be firing excess traders and investors ought to consider buying S&P 500 index funds -- at least until the market's price/earnings ratio starts spiking towards the nosebleed levels it reached in 2000 and 2007.
I have never been more convinced that Wall Street is a major source of concern trolls. One only has to watch CNBC over the last few years to savor the bloviating about central bank money-printing, out-of-control budget deficits, the collapse of the Euro Zone, a looming tech bubble, and clouds of uncertainty -- all designed to spur listeners to trade furiously in response to these daily injections of mindless terror.
For the time being, all those fears have come to naught. That's what you would conclude from looking at the Volatility Index (Vix) -- that captures how investors expect the stock market to go up and down over the next four weeks.
According to the New York Times, "On Friday, it neared its record low level, last reached in January 2007. A related indicator of the same phenomenon: The last time the Standard & Poor’s 500 index moved by more than 1 percent in a day was April 16, nearly two months ago. It’s not just stocks: Measures of volatility in the bond, currency and commodity markets are near multiyear lows as well."
What's a concern troll to do? If you are a Wall Street CEO, you are looking at your declining trading revenues and deciding whether you think it will rise enough in the months ahead to make it worth keeping your excess traders on the payroll.
And if not, you are firing traders to lower your costs and help meet your earnings targets.
Consider how much trading revenues have fallen at big banks like
Wall Street is looking at layoffs. According to the Wall Street Journal, "Firms such as Goldman Sachs, where fixed income, currencies, and commodities (FICC) trading units make up some 30% of overall revenues, may look to reduce headcount even after already slimming down in those areas in prior years."
Morgan Stanley has already made such cuts. Noted Quartz, "In fact, Morgan Stanley already is said to be reducing staff at a bond-trading unit in Canada–a unit that had been overseen by former rainmaker Glenn Hadden, who left the firm earlier this year."
Are stocks over-valued? I guess that might strike fear into peoples' hearts. But a look at the Shiller P/E ratio of the last 143 years suggests no. I am willing to believe that investors should sell if the P/E gets too high -- but at 19.47, stocks do not look poised for a plunge as they seem to do when the P/E gets above 40.
Another thing that would make me worry about stocks is an inverted yield curve. That's when short-term interest rates exceed long-term ones. The inverted yield curve is a great predictor of a recession since it makes it more attractive to hold money in short-term cash than to invest it over a longer time frame.
But that yield curve is firmly sloping upward and the problem remains that companies are sitting on a record $1.64 trillion in cash instead of investing it.
So do yourself a favor and invest the risk portion of your assets in an S&P 500 index fund. That won't help Wall Street traders much, but it could help you keep up with inflation.
