Back in September and October stocks were surging no matter what the major headlines or economic data looked like. Our Newswires colleague Donna Kardos Yesalavich even penned a column headlined “For Stocks, Bad Economic News Could Be God In Face Of QE2.” Here’s an excerpt from her Oct. 7 column:
On Wall Street, bad may be the new good when it comes to economic data.
Investors believe a weak September jobs report Friday from the Labor Department wouldn’t necessarily be unwelcome. In a twist of logic, negative economic snapshots could lift stocks on hopes central banks might unleash additional stimulus more quickly.
The expectation is that the Federal Reserve, the Bank of England and perhaps the Bank of Japan might embark on a second round of quantitative easing — dubbed by investors as “QE2″ — to keep the recovery going. That means Wall Street has been viewing every negative economic report as another reason to snap up stocks.
“It’s almost a win-win situation for equities,” said Owen Fitzpatrick, head of the equity strategy group at Deutsche Bank Private Wealth Management. “That seems like the environment we’ve been trading in for all of September and to some extent October.”
The S&P 500 went on to post a whopping 17% gain from the end of August through the beginning of November. But after a few slow days in the market, we can’t help but wonder if the opposite effect of the “bad news is good news” theory is starting to take place?
After hitting fresh two-year highs, US stocks have stalled out and are on pace for their third straight day of declines. Yesterday marked the DJIA and S&P 500′s biggest declines in three weeks and stocks are slumping again today. Today’s decline comes on the heels of dropping jobless claims and a narrower trade deficit, which are positive signals for the weak economy.
Falling imports from China and exports rising to a two-year high on the back of a weaker dollar helped shrink the total US deficit more than expected. And jobless claims decreased by 24,000 to 435,000 in the week ended Nov. 6, the lowest in four months. That positive report comes after last Friday’s much better than expected monthly jobs report, which showed 151,000 jobs were added in October.
Yet the stock market is overlooking the positive data and trading lower. Granted, the market could merely be taking a breather after its precipitous rise. But it’s never too early to start wondering if investors are starting to view good news as bad news, especially in light of the Fed’s QE2 announcement last week.
If the economy starts improving much more than anticipated, the central bank may not feel the need to go through with all of its $600B stimulus plan, which would be bad for stocks. The Fed may also be growing more hesitant as the global backlash against QE2 keeps mounting.
“Just a few trading sessions after the Fed announced the launch of QE2, strategists are already arguing that this program’s days may be numbered,” Josh Lipton writes at Minyanville, “The good ship QE2 has only just set sail but already some are forecasting an early return to economic harbor.”
Is good news becoming the new bad? Time will tell.