“It makes no sense,” groused a client Thursday afternoon. “Second quarter GDP rebounded to 4% and the markets sold off.”
Actually, it does.
What may be good for the economy and the country overall, may at times cause problems for the stock and bond markets. As I have often said, the stock market usually discounts events six months to a year ahead of time. Part of this year’s rally in the first half had everything to do with a strengthening economy, despite the fact that the data was inconclusive or down-right negative. This week’s GDP announcement was a classic “sell on the news” event.
Now that jobs are coming back to Main Street and the economy is finally starting to rev up, Wall Street is worried that this good news may, I repeat, may cause some unwanted consequences. Most of the concern revolves around what the Federal Reserve will or will not do about it.
No never mind that the Fed has tried to reassure investors that they have our back, that their policies are flexible enough and they have the tools to react quickly and handle unforeseen events if need be. But Wall Street is an untrusting lot.
Some analysts are worried that the Fed may overstay its welcome and continue to stimulate the economy beyond the point it should. Their nightmare is that inflation takes off in a way that could jeopardize the delicate balance we have now between growth and low inflation.
Then there are those that worry that the Fed may have to raise interest rates sooner and faster than the markets anticipate. Right now most Fed watchers expect the first central bank engineered rise in rates will occur no earlier than next summer. However, a stronger performance from the economy, coupled with rising employment, may force them to move earlier. Rising interest rates might, investors worry, jeopardize the gathering strength of the economy.
There’s more that worries Wall Street. Although you and I would cheer if the employment rate dropped below 6%, stock investors would see that as a sign that the Fed might tighten. Main Street would be even happier if wage growth accelerated as well as employment. After all, most working class Americans haven’t had a raise in years. But Wall Street would just see that as just another risk to a higher inflation rate.
If you are feeling about now that maybe Wall Street should just go *@#! itself, I can understand. By the way, none of these worries have to occur. The Fed could bring the economy in for a soft landing in the same way they rescued the economy, single-handedly, from the second Great Depression in our history.
My take is that the markets have been cruising for a bruising for months. All they needed was a catalyst and this present angst may do what sanctions, Russia, Ukraine, Crimea, Syria, Iraq, Portugal, Israel, Gaza, peace, war, missing airplanes, the umpteenth Argentine debt crisis and Ebola virus couldn’t do. Let’s see what happens.