Stock prices started retreating this past week, driven by newfound
concerns that good economic news is bad news for the stock market. What?
Normally, good economic news is good news for the market, right?
Goodness knows that there has been enough bad news recently to drive asset prices lower – concerns about China’s banking system, military action in the Gaza strip, the ISIS invasion of Iraq, Putin’s support of rebel activities
in Ukraine, Argentina’s default problems – the list goes on.
Now, the markets have something real – something economically tangible over which to worry.
Good News is Bad News?
Last week, good economic news was released in spades. On Wednesday, Washington reported that our economy grew by 4.0% during the second quarter. Many were stunned by the outright size of that number. One of the more important portions of that report showed that final sales growth came in at +2.1%, up from a “snow-influenced” -1% in the first quarter. A 4% growth number is big – big enough that it has to have gotten the Federal Reserve’s attention. Will rising GDP growth eventually foster an upward push in inflationary trends?
On Thursday, news showed that the Employment Cost Index rose by 0.7% during the second quarter, more than twice the growth rate of the first quarter’s 0.3% uptick. The report showed that wages rose by 0.6% for the quarter and benefit costs rose by 1.0%. American workers are starting to get pay increases.
Inflation bottomed last October at a 12-month rate of 1.0%. The latest inflation report shows the 12-month rate of change is now at 2.1%. In a separate report, the Cincinnati Fed believes the number is closer to 2.3%. Janet Yellen, Chairman of the Fed, says this is all noise. Apparently, the noise is loud enough to have caught the attention of stock market participants, as the Dow declined by almost 2% last Thursday, followed by further price weakness on Friday.
So, are we seeing the start of a long-awaited price correction? Frankly, I don’t know. No one knows. However, I do believe we have entered a new, secular bull market. Historically, stock overvaluation can be corrected in two fashions during a secular bull market – by either price or time. If the current environment is primarily a time correction, prices shouldn’t swoon terribly to the downside.
Goodness knows that there has been enough bad news recently to drive asset prices lower – concerns about China’s banking system, military action in the Gaza strip, the ISIS invasion of Iraq, Putin’s support of rebel activities
in Ukraine, Argentina’s default problems – the list goes on.
Now, the markets have something real – something economically tangible over which to worry.
Good News is Bad News?
Last week, good economic news was released in spades. On Wednesday, Washington reported that our economy grew by 4.0% during the second quarter. Many were stunned by the outright size of that number. One of the more important portions of that report showed that final sales growth came in at +2.1%, up from a “snow-influenced” -1% in the first quarter. A 4% growth number is big – big enough that it has to have gotten the Federal Reserve’s attention. Will rising GDP growth eventually foster an upward push in inflationary trends?
On Thursday, news showed that the Employment Cost Index rose by 0.7% during the second quarter, more than twice the growth rate of the first quarter’s 0.3% uptick. The report showed that wages rose by 0.6% for the quarter and benefit costs rose by 1.0%. American workers are starting to get pay increases.
Inflation bottomed last October at a 12-month rate of 1.0%. The latest inflation report shows the 12-month rate of change is now at 2.1%. In a separate report, the Cincinnati Fed believes the number is closer to 2.3%. Janet Yellen, Chairman of the Fed, says this is all noise. Apparently, the noise is loud enough to have caught the attention of stock market participants, as the Dow declined by almost 2% last Thursday, followed by further price weakness on Friday.
So, are we seeing the start of a long-awaited price correction? Frankly, I don’t know. No one knows. However, I do believe we have entered a new, secular bull market. Historically, stock overvaluation can be corrected in two fashions during a secular bull market – by either price or time. If the current environment is primarily a time correction, prices shouldn’t swoon terribly to the downside.
