Stocks seem disappointed with good U.S. manufacturing news

09/01/2011 3:36 pm EST


Jim Jubak

Founder and Editor,


That seems to be the stock market’s reaction today to the Institute for Supply Management’s report that U.S. manufacturing expanded in August.

Economists were expecting that the survey would drop to a reading of 48.5 for the month. Anything below 50 indicates that the sector is contracting.

Instead the index came in at 50.6, signaling the sector continues to expand, if only by the slimmest margin. That’s below the 50.9 recorded in July and the lowest reading since July 2009. But even if just barely, this is on the expansion side of the ledger.

So why would that be a disappointment to U.S. markets?

Because even very modestly good news at this point reduces the odds that the Federal Reserve will launch a big new round of bond buying. And a third program of quantitative easing, a QE 3, would have more power to drive up stock and bond prices than a modestly positive manufacturing number does.

Think of it this way—right now a small bit of positive news is actually a negative for the market in the opinion of big institutional investors and traders.

I know that seems perverse but in the short term the markets sometimes work that way.


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