Your Money

Admittedly, over the past few years stocks have taken a beating both in the market and in the minds of private investors. Four years after the fact, losses from the tech bubble still weigh on folks minds. But all that could be changing, a Wall Street Journal article suggests. The Journal notes a definite increase in the number of stock and bond purchases, which they extrapolate as increased interest from the private sector.

Unfortunately I'm not convinced that the increase in brokerage activity has anything to do with increased confidence in the stock market. While we'd like to think that reforms like Sarbanes-Oxley and certain tax breaks are encouraging more folks to save, the unfortunate truth is that much of the influx is from cash that's been sitting on the sidelines for four years. To put it simply, investors can't keep their money out of the market.

Blame it on the return of mild inflation, or the modest growth spurts of the economy. On some level, it has become clear that simply stuffing cash under a mattress is a bad idea. The problem is that the economy may not be as well off as some believe. Aside from worrying about current account deficits and trade imbalances, the real threat to today's economy is the rising cost of materials.

Oil spikes and the recovering steel markets are just two examples. Across the board companies are seeing rising materials costs, which many companies feel they are unable to pass on to consumers. The result is muted corporate earnings, or even loss of capital. These are bad for companies, but even worse for a stock market that already prices future earnings into many share prices. Over the past few weeks we have seen weakness in some stocks, namely those that have failed to meet earnings expectations. Investors have punished these firms for missing guidance, and if the costs of doing business continue to increase you can bet there will be more companies that don't meet expectations.

The point is, now is a pretty turbulent time to climb back into the market. The unfortunate thing is that many investors simply do not have the time to do their own research and are likely relying upon the opinions of so-called financial gurus. If we do experience a downturn in the stock market, it could seriously hurt public opinion of private investing. Not only would folks lose their nest eggs, but it could force the idea of privately investing assets out of favor for a long time.