Good News Is Bad News for the Market
If you looked at last week from the perspective of the children’s book If You Give a Mouse a Cookie, it might have gone like this:
If you give the United States a positive employment report, investors are going to ask whether interest rates will move higher. When they conclude the Federal Reserve may increase rates sooner rather than later, American stock markets may dip lower.
Yes, last week was one of those weeks when good news triggered not-so-good news. According to Barron’s:
“The February jobs report, showing a 295,000 gain in nonfarm payrolls, about 60,000 more than predicted by economists, plus a dip in the unemployment rate to 5.5 percent from 5.7 percent in January, evidently was enough to convince the markets that a June Fed rate hike is now likely. The June fed-funds futures contract was pricing in a 70 percent probability of a move to 0.25 percent to 0.5 percent at Friday’s settlement, up from 48 percent the day before, according to the CME.”
Reuters reported the good news: A stronger U.S. economy is better for U.S. stock markets over the long term. It also gave the not-so-good news: Investors’ worries that the Fed could choke economic growth by raising rates too soon led to a market sell-off.
As investors agitate, it may prove worthwhile to spend some time thinking about economic indicators. The Conference Board produces leading, coincident and lagging economic indexes, which comprise individual leading, coincident or lagging indicators. These indexes are intended to provide insight to U.S. economic change and help identify turning points in economic data. For example:
- The leading index is an early indicator. It is intended to mark turning points before economic change occurs.
- The coincident index tends to mirror current economic performance, turning up or down along with GDP (gross domestic product) growth. One component of the coincident index is the number of employees on nonfarm payrolls.
- The lagging index tends to reflect what has already happened.
In its most recent report, The Conference Board Leading Economic Index increased, which suggests a positive short-term outlook for 2015. However, the pace of increase slowed month-to-month, which indicates that downside risks remain.
|Data as of 3/6/15||1-Week||Y-T-D||1-Year||3-Year||5-Year||10-Year|
|Standard & Poor’s 500 (Domestic Stocks)||-1.6%||0.6%||10.4%||15.5%||12.7%||5.4%|
|10-Year Treasury Note (Yield Only)||2.2||NA||2.7||1.9||3.7||4.3|
|Gold (Per Ounce)||-3.2||-2.0||-12.6||-11.0||0.9||10.5|
|Bloomberg Commodity Index||0.0||-0.9||-22.4||-11.5||-4.9||-4.1|
|DJ Equity All REIT Total Return Index||-3.5||-0.7||16.9||14.1||15.4||8.4|
Do You Know Who Irving Fisher Was?
The Library of Economics and Liberty described him as:
“… one of America’s greatest mathematical economists and one of the clearest economics writers of all time. He had the intellect to use mathematics in virtually all his theories and the good sense to introduce it only after he had clearly explained the central principles in words. And he explained very well. Fisher’s Theory of Interest is written so clearly that graduate economics students can read—and understand—half the book in one sitting, something unheard of in technical economics.”
Unfortunately, he is also known for saying, “Stocks have reached what looks like a permanently high plateau,” on October 15, 1929. Just a few weeks later, the market crashed, along with Fisher’s credibility.
This is but one tale of our dismal ability to forecast. Regardless, we continue to try. Consider 2014: The Wall Street Journal’s survey of economists predicted 10-year Treasury rates would move higher (a unanimous opinion). There was good reason for analysts to forecast higher rates, but markets are complex and rates fell during the year. Survey participants predicted 10-year Treasury rates would finish at 3.52 percent—they finished at 2.17 percent.
Survey participants also anticipated crude oil would finish the year at about $95 a barrel. There was little reason for anyone to suspect a significant drop in oil prices when demand for energy is relatively strong around the world. Regardless, the final closing price per barrel was about $53.
So when people whose jobs involve tracking economic events and financial markets find it difficult to interpret how markets may perform, what are investors supposed to do? It is believed they should remain committed to investing best practices, which include prioritizing financial goals, maintaining well-allocated portfolios, managing risk and talking with financial advisors.
Weekly Fun—Think About It
“Start with what is right rather than what is acceptable.”
—Franz Kafka, novelist