Stocks may be up, but fear is back in market
April 16, 2013: 12:22 PM ET
CNNMoney's Fear and Greed Index hit Fear levels for the first time all year Monday. Click for more on the index.
Stocks bounced back Tuesday after their worst sell-off of the year. Gold rebounded as well, following two consecutive days of staggering declines.
It's a good sign that stocks (and to a lesser extent gold) are stabilizing. It's probably premature to say that Monday was the start of a much-needed market correction.
But make no mistake. People are still nervous. The terror attacks in Boston are a reminder of just how volatile the world is.
Related: What's next for the world's financial markets
The CBOE Market Volatility Index -- or VIX ( VIX) for short -- surged more than 40% Monday. The VIX is often referred to as Wall Street's fear gauge and big spikes can be an indication that investors are extremely worried.
The VIX did pull back more than 15% Tuesday as stocks rallied. But it's still higher than where it was at the start of trading Monday. So it's not as if investors have completely swept aside concerns about Monday's market sell-off just yet.
"There is anxiety and we probably will see that for awhile," said Randy Frederick, managing director of active trading and derivatives at Charles Schwab.
CNNMoney's own Fear & Greed Index, which looks at the VIX and six other market indicators, is also showing that investors remain on edge. The index hit Fear territory for the first time late Monday. Even with Tuesday's rebound, the index was still just in Neutral. And it remains a little closer to Fear than Greed.
Related: Why gold is not a safe haven
But the clearest signs that investors are still jittery are coming from the bond market. Long-term Treasury yields are just 1.71%. That's not far above their historical lows. Investors have continued to buy bonds (pushing their yields down in the process) even though it's been a hot year for stocks.
Given how well stocks have done, you'd expect bond yields to be surging. That's not the case.
Click chart for more on bond rates.
"People seem willing to take on a little more risk," said Sharon Stark, fixed income strategist with D.A. Davidson. "But investors went from putting money under the mattress to putting it in bonds and more conservative sectors in the stock market. This really shows the lack of direction and nervousness still in the market."
Just look at how well dividend paying stocks are doing. I wrote last week about the rise of McDonald's (MCD) and other McBoring stocks in the consumer staples, health care and utility sectors.
The huge rally in Coca-Cola (KO) Tuesday, following a modest earnings beat, is another example of the love affair with yield.
Related: The IPO market's latest craze: Dividends
Shares of Coke were up more than 5% Tuesday. Are investors really excited by the fact that Coke's sales volume rose a meager 4%? No. They appreciate the steady growth, but really love that Coke has a dividend that pays nearly 3%.
So what's next for stocks? Probably more of the same.
As long as the Federal Reserve is out there buying a huge chunk of bonds every month, long-term rates will stay low and investors will continue to be enamored with dividend stocks.
"This bull market is different than many others," Frederick said. "It's been driven by extremely low -- and you could say artificially low -- interest rates. So stable, dividend-paying stocks are doing well."
"There is not an appetite for growth stocks that don't pay dividends and there probably won't be until we have higher interest rates," he added.
But don't hold your breath.
Stark said there is no reason for the Fed to pull back on its so-called quantitative easing program anytime soon, not with questions lingering about the strength of the job recovery and the absence of any inflation. She thinks the 10-year Treasury yield could fall as low as 1.6% in the coming months and will struggle to move any higher than 2%.
With that in mind, the Fed will probably keep juicing stocks with low rates for as long as humanly possible. That's all well and good for now. But doesn't it also reflect just how tepid this supposedly roaring bull market is?
Related: IMF cuts global growth forecast
The economy is still very fragile. Europe remains a slow motion train wreck. Growth in China appears to be slowing again. North Korea is a huge wild card. And the tragedy in Boston just adds to all the uncertainty.
If the Fed and other central banks weren't being so aggressive, where would the Dow and S&P 500 be? The Fed is pushing investors into stocks whether they want to be there or not.
Investors are definitely still fearful. But it's getting harder to figure out what they are more afraid of: missing out on further stock market returns or the fact that the economy still stinks and that the world is a scary place.
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