Same good news, different day, same disappointment.
Stock index futures moved higher Wednesday morning on the announcement that second-quarter economic output had been revised upward. The economy shrank at an annual rate of 0.7 percent during the period, but that was better than the Wall Street consensus forecast of a 1.1 percent decline.
The rally lasted all of three minutes before prices turned decidedly lower. The drop was attributed to a weak report on manufacturing conditions in and around Chicago, but that explanation is nonsense. Most of the decline occurred before that tidbit of data was disclosed.
A more likely cause is a phenomenon dealt with here during the last month or so in one post or another: The recovery has already been factored into share prices.
One fund manager offers a more ominous explanation for why investors are becoming hard to please. It’s not just that the good news is already accounted for, said David Kovacs, chief investment officer of quantitative strategies for Turner Investment Partners, but rather that good news is really bad news.
As Kovacs sees things, every piece of data that suggests that something like normal economic growth has resumed brings the day closer that the Treasury will shut down the stimulus programs and that the Federal Reserve will begin to tighten monetary policy. The free lunch will be off the table and the cost of borrowing money to buy the next meal will go up.
“At some point there are going to be pressures to change [policies],” he said. “The Fed and Treasury are going to have to be less accommodating. Bonds and equities may sell off and the dollar will firm. What can cause that? Signs that the economy is self-sustaining.”
The next significant sign could arrive on Friday when the Labor Department issues its report on employment conditions for September. The consensus estimate of analysts polled by Bloomberg News is that the economy lost 170,000 net jobs, an improvement from the 216,000 jobs lost the month before.
One of two things can happen, and the stock market may be displeased either way.
The real number could be worse, as TrimTabs Investment Research, which has a good forecasting record, expects. TrimTabs is girding for a dismal report with a net 358,000 fewer people employed last month.
“Contrary to popular belief, the economy is not recovering,” Charles Biderman, the firm’s chief executive, said in a statement accompanying the prediction. If the result is anything close to that, investors likely would reach the same conclusion.
Say the number is comparatively benign. That might have the same impact as the GDP report and be taken as evidence that Wall Street is about to be left on its own.
“A better job picture would tell the Fed it’s time to put the brakes on,” Kovacs said.
With the prospect of buyers hitting the brakes themselves, whatever number comes up and whether Kovacs or Biderman have the economy figured best, the prudent move may be to front-run any sell-off. If there’s ballast in your portfolio that you’ve been thinking of casting off, consider doing it Thursday if the market’s higher so that you can rest easier on Friday.
