The Stock Market Loves Bad News

It is interesting to note when the stock market rises and falls. Over the past 35 years in watching the markets, I learned that there is usually little correlation between the moves and what the media ascribes the move to. Nevertheless, we can see short term reactions based upon shifts in sentiment.

The overwhelming sentiment within the market now is more cheap money. Wall Street is addicted to the gravy train the central banks were delivering. There is no 12 step program in the works for these folks. They are full blown junkies.

Thus, we see an interesting outlook on the market. Welcome to the Twilight Zone where bad is good and good is bad.

Image by Daniel Foster

The Federal Reserve

The big elephant in the room is Jerome Powell and the Federal Reserve. All eyes are upon them. Earnings are important but glossed over. What the market wants to know most is are interest rates going up or down? Which direction is the train heading?

For the market, down is good. Lower interest rates make the market very happy. Cheap money feeds to addition. Raising rates is akin to waning someone off heroin. Withdrawals are painful and not wanted.

Take the latest report released by the Fed. It indicated they are very concerned about the future of the United States economy. Read that again: they are very concerned about the future of the United States economy.

That could be taken as very bad news. If their fears are correct, we could see a massive pullback in the overall economy. That would be bad for jobs, revenues, and earnings.

How does the market respond?

The same way an addict responds if you come back from seeing the dope pusher.

Glee all around.

The fact the Fed is concerned about the future economy means that not only is an increase in interest rates off the table, but the likelihood of another rate cut goes up.

This makes the market very happy.

Bad news is good; good is bad.

Wall Street Benefits

A surging economy means interest rates are going to rise. At some point, inflation has to be taken into account. Nevertheless, Wall Street only wants more of that cheap money even if it means the entire economy is tanking.

It is the same thing with mergers. The stock market loves them. One problem with mergers is that layoffs take place. Obviously, streamlining an organization is a healthy think to do. However, when there is a rush of mergers, and tens of thousands are losing their jobs, that has economic impact.

Once again, the market does not care. Wall Street loves this regardless of the long term impact.

As long as Powell and his cohorts keep moving interest rates down, the Wall Street crowd will love him. It is one of the reasons I feel President Trump is hammering the Fed so hard about rates. There is a good chance that lower rates will help to fluff the market up more. Financial engineering at its best.

Wall Street spend so much effort trying to program the population into believing the market is the economy that it is about time someone took advantage of it. No matter what the reality is on the ground, keep propping up the market and all is well. Of course, it does not hurt that real estate and a few other markets go along for the ride also.

Think back to high school. A party when someone's parents were out of town was great right up to the point when the cops showed up and sent everyone home.

When this bubble burst it will not be pretty. Bad news is bad for a reason. When economies fail, markets go along with it. No matter how much financial engineering is done, recessions cannot be avoided. Trying to manipulate our way out of them tends to make a bigger mess than what would have happened naturally.

None of this matters to the market. Cheap money means more stock buybacks which helps the EPS reported each quarter.

Powell and the Fed are Santa Clause, bringing a huge present on Christmas Day.

Money For Them, Not For You

One of the misconceptions is that low interest rates mean easy money. This is not the case, at least not for most.

Corporations are able to take advantage of easy money because they can tap the capital markets. The same is not true for individuals or private businesses.

When Tesla needs money, it can access the debt market and float bonds. If a restaurant wants to open up a second location, it requires going to a bank. When the economy is faltering, cheap money means nothing because it is not accessible.

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