Tuesday, 7 April 2015

Stocks and the Fundamental Backdrop: The New Strategy is “Hope”

By Pater Tenebrarum

When Will Bad News Cease to be Good News for Stocks?

It is quite amazing to watch this. Even as one economic datum after another indicates that a major slowdown is underway that could well turn into a recession (keep in mind that this is not a certainty – at similar junctures in recent years, aggregate economic data recovered just in the nick of time), the US stock market continues to take everything in stride.

The most recent example was the enormous “miss” of the payrolls report on Friday. The cash market was closed on Friday, but US stock futures still traded briefly after the release and declined sharply. Whatever concerns futures traders had were evidently forgotten by Monday. After all, weak jobs data mean more free money from the central bank for longer, as the much talked about rate hike will likely be put off further.

It appears though that we didn’t really get the memo. According to press reports, the market’s sanguine reception of the payrolls data miss isn’t driven by expectations about central bank policy. Instead, the main driver is “hope”. Hope is generally not thought to be an investment strategy, but there it is. What is even more curious is what the hope is all about. A headline at Reuters reads: Stock markets hope earnings offset weak economic data”. Say what?

Continue reading the article here.