Stock Market Welcomes Bad News


U.S. stock markets have been acting very strange of late, and economists worry this may portend serious trouble.

On July 19, Federal Reserve Chairman Ben Bernanke warned Congress the economy was slowing down. Investors took that as a positive, and the stock market rose. On July 28, after the release of governmental statistics stating sharply lower economic growth during the second quarter, U.S. stocks again rallied strongly.

It seems strange stocks would go up in value after poor economic news. If this was an isolated incident, it could be written off as a market aberration—but it isn’t. The stock market has lately been rallying upon the release of all kinds of negative economic indicators: weaker-than-expected manufacturing activity and other figures that show a slowdown in the U.S. economy.

Economic analyst Paul van Eeden summed up the ominous market action on July 6: “The reasoning goes that a sufficient slowdown in the economy will cause the Federal Reserve to stop raising interest rates, and since higher interest rates are generally bad news for stocks, then a hiatus in rising interest rates should be good for stocks.

“You don’t have to be a genius to figure out that when the market hopes for bad economic news and interprets them as good news, something is wrong. Since when are falling retail sales good for stocks? Since when is reduced manufacturing activity good for stocks? Are stock traders so obsessed with the Fed’s next move that they forget to look at what is really going on?

“If the U.S. economy is slowing down, as confirmed by tepid retail sales and slowing manufacturing activity, then it is merely a matter of time before corporate earnings come under pressure and stock prices start falling.

“When the market becomes this shortsighted, you should know that we are in a dangerous environment. Anything can happen.”

Whether or not recent market action indicates a pending collapse remains to be seen. But given the plethora of negative economic indicators of late—the unwinding of the yen carry trade; inverted yield curves; rising inflation and interest rates; record negative personal savings rates; record trade deficits and governmental debt; a deflating housing bubble—a stock market bust looms ever larger.