Much ado has been made over the last few years about when the Fed will raise interest rates. Many believe the low rates (among other things) have been a key driver for the six-plus year bull run that Wall Street has enjoyed; rising rates threatens that in the minds of the public. But as the Fed nears its deadline to finally bring rates higher, it seems that markets are slowly beginning to accept the decision.
When Good News is Bad and Bad News is Good
The Fed’s willingness to step in and save the economy (and or stock market) at the first sign of trouble these past few years has flipped market psychology on its head. It used to be that good news and positive data was a cause for celebration on Wall Street. Likewise, negative data or signs of a slowing economy brought on selling pressures. But with the Fed riding to the rescue of the stock market, we have seen that ideology work in reverse over the last few years.
It has been confusing to say the least, but the pattern has clearly been there. As of late, bad news from the market was often taken as a positive and met with buying. This is because the market believed that the Fed would ride to the rescue and offer a new round of QE or utilize another tool in their chest to keep stocks afloat. For six years, following this mentality has paid off handsomely.
That process has worked in reverse as well. Strong employment numbers or other positive indicators have actually caused selling pressures, because the market believed that it may force the Fed to finally raise rates and back down from policies meant to buoy the economy.
It has certainly been a confusing time to invest, and one that has frustrated many as a number of long relied-upon indicators have no longer been effective in a Fed market. But it looks like markets may finally be reverting to normal, and accepting that the Fed will eventually have to raise rates.
Coming to Terms
In Mid-March, the Fed finally removed the word “patient” from their statement, suggesting that a raise in rates may be sometime in the not-too distant future. Since that time, it appears that the market has come to terms with the reality that rates will need to be risen. Though it has only been a few weeks, we have already seen two examples of markets behaving in a more normal manner.
Durable goods numbers in late March came in lower than expected, and were met with selling on Wall Street. Just this morning came another report with the ADP numbers showing weaker than expected growth in the private jobs sector, casting doubt about the upcoming unemployment report.
The Bottom Line: Return to Normalcy
While these are just two examples and they certainly to not signal a sure change in the markets, it is something to keep an eye on. Markets will eventually return to a more normal state of good news being good and bad news bad. When the Fed exits the market, or at least loosens its grip, markets will return to a more normal psychology and regain some semblance of predictability and logic.
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