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When bad news doesn't take stocks down, the rally is still in charge
11/18/2009 5:06 pm EST
How bad has the news been?
Heavy duty bad.
On November 18, for example, investors got early morning news that housing starts had collapsed in October. Starts fell by 10.2% to 529,000 from 592,000 in September.
That was a huge negative surprise. Wall Street had be3en expecting that starts would inch ahead to 600,000 for the month.
And a huge disappointment to investors who had convinced themselves that the economy was on the mend after starts climbed to 593,000 in July. Starts stayed at about that level in August and September. With the economy returning to growth in the third quarter—and at a very healthy 3.5% annual rate too—there seemed to be solid evidence that housing, the sickest sector of the economy, was headed to the recovery room.
The recent numbers threw that all into doubt. Yes, you can rationalize them by saying the drop in starts was a response to what was supposed to be the end of the federal government’s $8,000 tax break for first-time home buyers on December 1. (That program, with changes, has been extended but too recently for the effects to show up in the October numbers.)
But as comforting as that logic is, it runs smack into reality once you look a little deeper into the data. Starts for single-family homes fell 6.8% but starts for multi-family homes fell 34.5%. Hard to see how that lunge might be related to worries over the expiration of tax credits for first time home buyers. With rental demand projected to climb in the next few years, you’d expect activity in the multi-family sector to hold up well. What’s going on? I haven’t heard a convincing explanation.
But the key point for investors is that confronted by this huge piece of bad news, the S&P 500 dropped a whole 0.52 point. That’s 0.05%. The index closed at 1109.80.
The pattern the day before was similar. Bad news on weaker than expected U.S. manufacturing activity couldn’t even keep stocks down for the day. On November 17 the S&P 500 actually climbed by 1.02 points. Not much. But any gain in the face of bad news is an indicator of how strongly the stock market is being pushed up by cash flows.
In fact it helps to understand this market in terms of a battle between economic news and fears, on the one hand, and cash flows into U.S. equities (and commodities and overseas financial markets). Right now cash flows are strong enough to outweigh some pretty negative economic news.
It won’t always be this way. But right now cash trumps news.
The trend is still up.
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