Why Some Investors Lament Good News

Why Some Investors Lament Good News

Forrest Bell, CFP®

The global stock market rally that began in mid-June continued for the first few weeks of August, before fizzling out in the second half of the month. The U.S. equity market rose nearly 5% on continued optimism for an upcoming pivot in the Fed’s interest rate hiking campaign. However, Fed officials said nothing to indicate that a pivot was on the horizon, causing U.S. stocks to ultimately end the month down 4%. Even though the “Fed pivot” optimism seems to have ended, the U.S. market is still up from its year-to-date low point on June 16th.

Results from the bond market were more mixed with certain kinds of bonds faring much better than others. Specifically, short-term bonds and Treasury inflation-protected securities performed the best. While interest rate increases and a modest repricing of corporate credit risk pushed the overall bond market down 2.8% for the month, short-term bonds and Treasury inflation-protected securities widened their existing outperformance over the rest of the fixed-income market.

As we mentioned in our letter last month, the idea that the Federal Reserve would begin cutting rates seemed overly optimistic. The Fed agreed. Through various speeches and interviews, Fed officials pushed back on the idea that they would begin lowering rates. Financial markets currently estimate a 0.50 or 0.75% increase in the Fed’s policy rate at their September meeting, a reasonable approach to us. August data showed that inflation had come down, but it also showed that inflation was still high.

With financial markets being heavily influenced by Fed policy, we seem to have entered an environment of, “good news is bad news, bad news is good news.” When a surprise quarterly decline in U.S. GDP was revealed in late July, the stock market rallied on the news. Alternatively, when news that consumer confidence improved and job openings increased with fewer layoffs, the U.S. stock market fell. How could that be? Investors have become so focused on the Federal Reserve that they have begun to weigh the Fed’s potential actions even more than actual fundamental economic developments. This has led investors to the strange position of cheering on news of moderate economic weakness and lamenting news showing economic strength, all because of what this might mean for the raising or lowering of interest rates.

In the short-term, Fed interest rate policy will continue to move markets up and down, but the rationale for “bad news is good news” is dubious to us. The long-term direction of the stock market will be largely dependent on corporate profits and economic health and that is what investors should root for. Predicting Fed policy or short-term market reactions is impossible and a distraction to the more important matter: Sticking to your financial plan through the market’s ups and downs.

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