Stocks Dropping on Good News?
06/04/2013 9:13 am EST
MoneyShow's Jim Jubak shares his interpretation of the recent market action, which has many confused, as it dropped while economic data was better than expected.
US economic growth: threat or menace? Well, it feels like that some days, like on May 29, when basically the market went down on very good economic news.
The news had been that housing prices were ahead in March, according to the Case-Shiller Index, by about 10.9% year-over-year. That was above the 10.1% that economists were looking for. We had a big surge in consumer confidence. Again, it came in higher than economists expected. So why did the market go down at that point?
Well, it's all about trying to figure out what the Fed is going to do with QE3, with its program of buying $85 million in month in Treasuries and mortgage backed securities. The idea, the thing that makes growth into a menace, is that if the economy is growing strong enough, the Fed is going to start to taper off this buying program sooner. That will mean, probably, higher interest rates. It might mean a slower economy.
You can see that growth that's too strong might worry people. That's what you got on the 29th. You got worry, and therefore the market went down. Of course, on the 28th-the day before, when people were looking at a US economy that seemed strong, stronger than expected-the stock market went up.
The market has not really decided how much growth is too much. How much growth is a bad thing? How much growth is a good thing? It makes this market very hard to predict day-to-day, because these things aren't really going to be settled.
On the 30th of May, we got a report for first-quarter GDP. The first read was about 2.5% growth, but this is a very backward-looking number. It's about the first quarter, the quarter that ended in March.
What traders and investors really want to know is what's going to happen in
the June quarter, in September quarter, in the December quarter. Are we going to
see the effects of the hike in Social Security withholding tax? The
sequester...are they going to overwhelm growth, in which case the Fed might
decide not to start tapering off? Or indeed, is growth going to be strong enough
so the Fed will start moving? That's one question.
The second set of questions revolve around when the markets start to anticipate the Fed's move. Even if the market knows exactly what the Fed was going to do, the question is well, if the Fed is going to start tapering with its September or October meeting, when should you start rearranging your portfolio?
What you're really trying to do there is to guess what everybody else in the market is trying to do or is thinking about doing ahead of time. It's very, very difficult. Mass psychology is hard to predict, and trying to figure out what your fellow investors are going to do in a way that lets you make a profit? Extremely difficult.
The market is really going to be backing and filling. On days after the bad week we had in Japanese equities-the week was the 22nd, 23rd, 24th-after that week, the risk-reward was sort of tilted toward putting more money in the market, so growth was a good thing. It was a risk-freer thing. A lot of it will depend on where the market is, how much it's gone up, when it's gone up. People will feel free to worry and take a little profit off the table.
I think we're looking at a market that in terms of general direction is not going to have much. It's going to have a lot of backing and filling, but until the Fed really starts to move or the people get convinced of the Fed, they know when the Fed is going to move, I doubt you get much of a trend in the market one way or another.
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