Danger of Boredom (22 June 2009)

Not that much going on right now.  Investors are watching for more economic data. Many eyes also on the Federal Reserve which are holding its Open Market Committee meeting on Tuesday and Wednesday. Personally, I don’t think they will do anything drastic. They don’t want to kill off any recovery by hiking rates, but they don’t like to see treasury debt yields go up either. At this moment though, they are unlikely to raise rates. So, at the most, they might come up with some strong language about inflation, but they are going to do nothing about it.
 

The biggest danger in the near term to many investors is boredom. We risk making moves and switching just because our investments aren’t moving much. Markets can’t go up 50% every other 3 months. At the same time, if they are not going to crash, then the investors waiting for it to come back down to levels of March 9th are going to be disappointed as well.

Boredom is a danger because people run out of patience. After the run up, we now need more proof from positive economic data and from companies. Yet, many typically have no patience. They want the signs to show up now. Economies move relatively slowly, and even if an economic recovery is now starting to take hold, you simply won’t see a massive turnaround in data that some seems to expect.

On the flip side, there is limited downside to markets as well because it is happening in the backdrop of a recovering economy (though not as fast as some wish to see), and there is a lot of liquidity. Its very possible we may see markets stay range bound, fluctuating up and down but going nowhere in the short term. I say possible, because short term predictions are notoriously unreliable.

But eventually, stronger data will start to come in. And that will form the basis for the next leg up. But investors who are too impatient or bored with markets going nowhere may switch for the sake of switching, or they pull their money out. So, beware the dangers of boredom.