But I think Tuesday's 130-point rally in the Dow Industrials may be an exception. In fact, that rally actually may suggest that the economy in general, and the market in particular, are weaker than they already appear.
I concede that the reasons why this may be so are not obvious. But the logic behind it is no more far-fetched than the notion that the stock market's reaction to various developments is very revealing about what concerns and worries are on investors' minds.
And Tuesday's reaction to the Federal Reserve's quarter-point interest rate hike would seem to suggest that they are awfully worried about the health of the economy.
After all, the stock market doesn't normally rally when the Fed raises interest rates. But it appears as though it did so on Tuesday because investors were worried that if the Fed had decided not to raise rates, it would have been because Fed governors believed the economy was too fragile to withstand the rate increase that everyone for six weeks had known was coming.
Sort of like, bad news is good news because it could have been a lot worse.
It sounds straight out of Alice's looking-glass world, I know. But a number of advisers mentioned this rationale on Tuesday, actually predicting the market would have fallen if the Fed did not raise rates.
To see how convoluted these rationales are, imagine what the market's reaction would have been if the economy were a lot stronger right now. In such an event, investors would not have needed the Federal Reserve to tell them that the economy is healthy and strong. And a decision not to raise rates would have been met by a powerful rally, not a decline.
In focusing on the stock market's reaction to bad news, I'm following the lead of a 2001 study by three economists, finance professor John Boyd of the University of Minnesota's Carlson School, Fannie Mae economist Jian Hu, and finance professor Ravi Jagannathan of Northwestern University's Kellogg School.
The bad news that these economists focused on was higher unemployment, not interest rate hikes, but I think the lessons are the same. They studied how the stock market reacted to all of the monthly unemployment announcements between 1962 and 1995, and found that when the economy was in recession, the stock market typically fell when the unemployment news was unexpectedly bad. But when the economy was expanding, more often than not the market rallied on such occasions.
We got an illustration of this phenomenon on Friday, when the market plunged in reaction to the much weaker than expected unemployment report. According to these economists' research, this reaction is more often seen during recessions than during strong economic expansions.
So between Friday's reaction to the unemployment news and Tuesday's reaction to the Fed's rate hike, we have twice in three trading sessions gained insight into the health of the economy.
And the picture isn't pretty.
Quelle: cbs.marketwatch.com
So long,
Calexa
www.investorweb.de
I concede that the reasons why this may be so are not obvious. But the logic behind it is no more far-fetched than the notion that the stock market's reaction to various developments is very revealing about what concerns and worries are on investors' minds.
And Tuesday's reaction to the Federal Reserve's quarter-point interest rate hike would seem to suggest that they are awfully worried about the health of the economy.
After all, the stock market doesn't normally rally when the Fed raises interest rates. But it appears as though it did so on Tuesday because investors were worried that if the Fed had decided not to raise rates, it would have been because Fed governors believed the economy was too fragile to withstand the rate increase that everyone for six weeks had known was coming.
Sort of like, bad news is good news because it could have been a lot worse.
It sounds straight out of Alice's looking-glass world, I know. But a number of advisers mentioned this rationale on Tuesday, actually predicting the market would have fallen if the Fed did not raise rates.
To see how convoluted these rationales are, imagine what the market's reaction would have been if the economy were a lot stronger right now. In such an event, investors would not have needed the Federal Reserve to tell them that the economy is healthy and strong. And a decision not to raise rates would have been met by a powerful rally, not a decline.
In focusing on the stock market's reaction to bad news, I'm following the lead of a 2001 study by three economists, finance professor John Boyd of the University of Minnesota's Carlson School, Fannie Mae economist Jian Hu, and finance professor Ravi Jagannathan of Northwestern University's Kellogg School.
The bad news that these economists focused on was higher unemployment, not interest rate hikes, but I think the lessons are the same. They studied how the stock market reacted to all of the monthly unemployment announcements between 1962 and 1995, and found that when the economy was in recession, the stock market typically fell when the unemployment news was unexpectedly bad. But when the economy was expanding, more often than not the market rallied on such occasions.
We got an illustration of this phenomenon on Friday, when the market plunged in reaction to the much weaker than expected unemployment report. According to these economists' research, this reaction is more often seen during recessions than during strong economic expansions.
So between Friday's reaction to the unemployment news and Tuesday's reaction to the Fed's rate hike, we have twice in three trading sessions gained insight into the health of the economy.
And the picture isn't pretty.
Quelle: cbs.marketwatch.com
So long,
Calexa
www.investorweb.de
