With Consensus on Fed Rate Increase Moving to September, Bad News Has Less Power to Move Market Up

04/24/2015 9:15 am EST

Focus: MARKETS

Jim Jubak

Founder and Editor, JubakPicks.com

Since September has become the overwhelming month of choice for when the Fed may raise rates, bad news is now not as likely to produce a huge move in the markets, and MoneyShow’s Jim Jubak thinks that leaves stocks to climb higher.

When you read US economic data like Thursday morning’s report on New Home sales for March or the initial claims for unemployment for the prior week, you need to read them up against a very different consensus on when the Federal Reserve will decide on its first interest rate increase.

That new consensus has changed the equation for when bad news is good and vice versa.

When Bloomberg conducted its monthly survey of economists on when the Fed will raise rates during the week of April 3-8, September had become the overwhelming month of choice. 71% of the economists surveyed said the Fed’s move would be delayed until September. That was a huge jump from the 32% plunking for September in the March 6-11 survey.

The percentage voting for June plunged to 12% in the April survey from 45% at the time of the March survey. July, which had not been a popular choice in March with a 12% share of the ballots, fell even further to 5%.

There’s still room to move the consensus toward September—71% could become 80%—but much of the move in sentiment is done. And while the market doesn’t hang on economists’ every word, it is likely that at the big Wall Street houses, at least, September has been baked into forecasts and stock picks.

That means that when we get bad economic news, as we did on Thursday, it’s not going to produce a huge move in the market. The bad news is confirming the consensus rather than moving market participants to a new consensus. So Thursday, April 23, the disappointing new home sales for March—481,000 annualized, down from 539,000 in February and below the consensus of economists surveyed by Briefing.com of 520,000—didn’t produce a huge move on a belief that the data would delay the Fed’s move until September. The Standard & Poor’s 500 stock index climbed just 4.97 points or 0.24%. Even a similarly disappointing increase in initial claims for unemployment to 295,000 for the week ended on April 11, up from 294,000 the week before (well within the margin of error, I know) and above the consensus expectation for a drop to 288,000, didn’t provide much fuel.

I think the failure of bad news to provide much in the way of fuel against the current consensus is important at this point in the market because it leaves stocks, already trading or near all-time highs, to climb higher without the help of a change in interest rate sentiment. That leaves it up to earnings growth to push stocks higher, and so far, while the quarter has certainly not been an earnings disaster, the earnings story hasn’t been strong enough to push stocks up speedily from here.

Which is, of course, not the same as saying we’re due for a big correction. I frankly expect the meandering market of 2015, so far, to continue through the second quarter. The Standard & Poor’s 500 is up 3.24% year to date as of the close on April 23.

This context could well change later in the year if the market consensus starts to move from September to December or some time in 2016. I think that’s extremely likely, especially given the weak economic growth we’re seeing in the rest of the world. At which point, bad news will become good news again, unless, that is, that it is just too bad. 

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