Stock Market: “Now, Let Me Get This Straight…”

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Stock Market: “Now, Let Me Get This Straight…” by Bob Johnson, PhD, CFA®, CAIA®, President & CEO, The American College

“What a strange world we live in…Said Alice to the Queen of hearts” – Lewis Carroll, Alice in Wonderland

U.S. stock markets fell around 1 ½ percent on Friday following a much better than expected jobs report. Employers added 295,000 jobs when only 235,000 new jobs were expected. Try explaining that to an undergraduate business student who has been told that the stock market is a reflection of the strengths or weaknesses of the underlying businesses comprising the index. Or, try explaining that to a client who just saw his portfolio decline in value.

If more people are working shouldn’t that be good news for the economy and the stock market? Does that mean the market would have actually rallied if fewer new jobs would have been created?

We do live in interesting times. The fixation on Federal Reserve policy and the speculation on when the Fed will move on interest rates dominate the markets. The conventional wisdom says that there is a tradeoff between economic growth and inflation – that if an economy “heats up” and is growing too rapidly, central bankers need to step in and cool the economy to prevent inflation from becoming a problem.

But, with interest rates at near zero in the U.S. and with global interest rates in negative territory in some countries – yes, depositors are actually being charged to keep their money in an account – we are, it seems, in uncharted territory.

As an avid Fed watcher and co-author of the book Invest With The Fed, I am a big believer in the old Marty Zweig mantra – “don’t fight the Fed.” But, what does that mean? What my co-authors, Gerry Jensen of Northern Illinois University and Luis Garcia-Feijoo of Florida Atlantic University and I have found is that it isn’t so much the level of market interest rates that matters but the direction of changes in those rates.

This means that even minor increases – or even the threat of minor increases – in interest rates from the unprecedented low rates of today are viewed negatively by stock investors.

In essence, the current bull market could end because of an economy that recovers too quickly.

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