Insights & Advice

|

Bad News is Good News

Both here and abroad the economic data is indicating that the world’s economies are contracting. Yet, global stock markets are rising. Once upon a time that would have been a contradiction, but not today.

Over the past year the financial problems of Europe have been well-publicized. Starting with Greece, most of the southern tier of European Union countries have been mired in recession, high debt and declining exports. Those problems have infected the entire continent, resulting in an EU-wide recession, but that is old news.

Over in Asia the story is the same. China, the economic engine of that region, has also experienced slowing growth, reducing the prospects for all its neighbors in the process. And now these problems are coming home to roost here in the United States.

Factory orders in the U.S. declined in June for the first time since 2009. The nation’s manufacturing output has been one of the drivers of our own recovery but weakening demand from overseas, coupled with declining currencies in our export markets have resulted in a slowdown in U.S. output and exports.

It is not just manufacturing, overall economic numbers coming out of most sectors of our economy have shown a gradual slowdown. Investors are not only taking this bad news in stride but are actually bidding up the stock market because of it.

Readers only have to look back over the last few years to see the same kind of phenomena occurring over and over again. It usually occurs during the summer months and has a decidedly positive impact on the stock market. The answer lies in the continued government interventions in the private sector economy we have seen since the financial crisis.

Investors are now conditioned to expect governments to intercede when economies begin to slow down. There was a time in our country (as well as overseas) when periods of economic growth, interrupted by recession, was the normal give and take of free-market economies, but no more.

Today the private and public sectors are intimately joined at the hip. The Federal Reserve here at home and central banks abroad have made it their responsibility to keep their countries’ economies afloat with every means at their disposal. After several such interventions, stock market investors are conditioned to view bad news as good news when it comes to the economy.

Market participants fully expect the Fed will save them once again this summer. The economy only needs to slow enough to threaten a recession, investors believe, before the Fed will take action. Like crack addicts, we have all become addicted to these moves by the Fed. Unfortunately, their efforts, while probably keeping the economy out of recession, have done little to grow the economy.

What it has done is shift the seat of financial power to Washington and makes irrelevant the traditional tools for analyzing companies and markets. And along the way it has transformed the stock market into one of those roller coaster rides usually seen only in amusement parks.

Posted in A Few Dollars More, Investment Portfolios