Can bad news for the economy really be good news for the stock market?

 

Compare and contrast the following: one the caption from a 1981 New Yorker cartoon, the other a real news story that appeared on Reuters earlier this week.

Here’s one: “On Wall Street today, news of lower interest rates sent the stock market up, but then the expectation that those rates would be inflationary sent the market down, until the realization that lower rates might stimulate the sluggish economy pushed the market up, before it ultimately went down on fears that an overheated economy would lead to a reimposition of higher interest rates.”

Here’s the other: “U.S. stocks edged higher in light volume on Monday after a steep drop in orders for long-lasting manufactured goods pushed back expectations the Federal Reserve will soon begin to wind down its economic stimulus.

Durable goods orders recorded their biggest drop in nearly a year in July… The weak data was encouraging to investors because the Federal Reserve has made it clear its decision to slow its $85 billion a month in asset purchases, which has been instrumental to Wall Street’s rally, is dependent on strong economic figures.”

In case it’s not clear, the cartoon caption was first. The Reuters story meanwhile is dead serious: unexpectedly bad news for the economy seems to have caused the stock market to rise. As the story says, this seems to be because the bad economic news could affect Federal Reserve actions—and the stock market is more concerned right now about Fed actions than it is about the economy.

At one level, this might seem a little bit silly. But really it’s just a reminder that the stock market is messy. It’s a complex system. Simple analysis of market behavior can sometimes be too simple.

My colleague Mike Sylvanus, who brought the Reuters story to my attention, drew his own conclusions from it. Quoting Gloria Clemente (played by Rosie Perez) in the classic move White Men Can’t Jump, he says: “Sometimes when you win, you really lose, and sometimes when you lose, you really win, and sometimes when you win or lose, you actually tie, and sometimes when you tie, you actually win or lose. Winning and losing is all one big organic globule, from which one extracts what one needs.”

And who could disagree with that?

 


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One response to “Can bad news for the economy really be good news for the stock market?”

  1. Tim Hider says:

    Received a great laugh this morning reading this post. Thank you, Bob.

    Trying to make sense of it all (stock market ups and downs) is difficult. That cartoon was classic.
    Big fan of your posts.

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