Jul 18, 2012

Equities Ignoring Negative Data is Cause for Concern

This has been the trend over the last week - bad economic data comes out, yet the market plows on onwards and upwards. Last Friday, Univ. of Michigan Consumer Confidence disappointed by a point and a half (72 vs 73.5 expected). Ignoring that completely, the SPX rallied hard, investors choosing to focus on the positive but heavily engineered JPM earnings instead. It was a similar story when July Retail Sales printed a dismal -0.5% on Monday vs +0.2% expected.

The market tends to ignore bad data points in one of two situations. It does that at the bottom of long bear markets, under heavily oversold conditions,
when the sentiment has been terrible for a long time and there is simply no one left to sell. Another time it does that is at the top of bull markets, where the reality has not yet set in that things are about to change, and everyone is trying their hand at buying the dip. The latter scenario is a bit more likely at the moment.

The above commentary has deliberately ignored one major factor - Bernanke's testimony to Congress. Will Wall Street get another dose of QE to feed its addiction, or will the economy finally have to fend for itself. Given the decreasing marginal returns on monetary stimulus that have been apparent with each successive tranche of easing, the latter is more likely. And that may be when all the bad news hits at once.

(More WhatIf Economics posts)

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