Investor confidence is falling, and it's little wonder

Friday’s sharp market sell-off reversed the gains of the week as investor confidence took another lurch downwards.

The US S&P 500 index fell by 2.9%, which surprised many, given the positive news that Goldman Sachs had settled with the Securities and Exchange Commission, BP had stemmed the Macondo well, at least temporarily, and inflation was falling.

Even the fact that the Thomson Reuters/University of Michigan index of consumer detriment fell from 76 to 66.5, the lowest since last August was not widely blamed for the pull-back, which was steady throughout the day rather a sharp reactive move.

Downbeat economic indicators

Indeed, a growing number of investors believe that the resolution of a number of issues, such as BP and Goldman, were merely papering over the cracks of a glut of recent weak economic data. 

Tim Price, director of investment at PFP Wealth Management, points to a slew of negative indicators. He points out that the Baltic Dry Index, which tracks worldwide international shipping prices of dry bulk, has fallen by almost 60% from its peak and is in its longest streak of down months for nine years. The Philadelphia Fed’s July index of new manufacturing orders slumped from 9.0 to -4.3, the US workforce has contracted by one million over the past two months and US mortgage applications have plummeted by 42% to a 13 year low.

‘Over recent weeks, the future has seemed, to us, at least, that much clearer: deflationary, with a double dip more or less a racing certainty,’ Price says.

‘If this view turns out to be justified, then it supports arguments for the highest quality bonds, the most defensive equities, if equities at all, genuine absolute return funds and gold.’

Yields on US government bonds hit all time lows

Certainly a significant number of investors are backing Price’s arguments if two year Treasury yields are anything to go by. They have hit an all-time record low of 0.58%, lower than the levels seen in the aftermath of the collapse of Lehman Brothers and AIG.

What is perhaps more surprising is the reaction of the equivalent German bund, which has actually been creeping higher, despite the concerns of euro contagion following the withdrawal of International Monetary Fund support for Hungary.

‘For the first time since the Greek crisis blew out for all to see, German two year bonds are yielding more than US bonds,’ points out James Barnes, an economist at GaveKal.