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How the stock market's bad news is good news & # 39; races could come to an end



Investors who treat bad news as good news – and vice versa, are narrative shorthand at the moment of explaining daily stock market moves, but the threatening second-quarter US earnings reporting season may soon change the equation, an analyst warned Tuesday.

The good news-the-bad news release of the phenomenon was shown last Friday after a stronger than expected June June job report triggered a modest stock market turnaround as investors scaled back on the expected rate cut by the Federal Reserve.

Prior to the data, investors had pushed all three major US stock indices – S & P 500

SPX, + 0.12%

Dow Jones Industrial

DJIA, -0.08%

and Nasdaq Composite

COMP, + 0.54%

– to register completed Wednesday, buying enthusiasm attributed to enthusiasm for aggressive Fed monetary relief after recent weak economic data.

Echo of 2001 and 2007

counter-intuitive dynamics, which have investors expressing disappointment at strong economic data and joy over weak numbers, have exclaimed some market observers, but it is hardly a new phenomenon, noted François Trahan, strategist at UBS, in a note to clients. [19659002] "The tension investors are now showing imminent Fed relief is quite typical," Trahan wrote. "In fact, there were similar short-term periods of excitement both in 2001 and 2007, when investors began to focus on upcoming price reductions."

But as investors might remember, none of the episodes released as market noise had expected, Trahan observed. While expanded rate-cut rallies were a feature of the 1990s, they have been shown to be short-lived over the past 20 years, as market valuation measures, such as the price-to-earnings ratio, temporarily expanded, but then began to shrink in light. of weaker leading indicators, he said.

Spotlight earnings

It sets the second quarter earnings reporting season, which is set to start early next week with results from some bank balances in focus. Trahan noted that in contrast to the 1990s, the so-called "Fed pad" was little used in 2001 and 2007 when the S & P 500 index revenue growth dropped to 0%.

A put set entitles the right holder, but not the obligation to sell an underlying asset at a fixed price with a certain amount of time, and provides insurance against loss. The metaphorical Fed pad is a reference to the belief that the central bank will take action to strengthen property prices in the event of a financial downturn.

Moreover, profit growth has slowed faster than economic data suggests, Trahan said. This is due in part to import tariffs imposed by President Trump, but is largely explained by the 2018 corporate tax reductions that go on comparisons years ago.

Companies in the S&P 500 index are expected to see a 2.6% decline in earnings in the second quarter, according to FactSet.

The question of the premise

But not everyone agrees that investors treat bad news as good news. Krishna Memani, vice president of investment in Invesco, argued in a Tuesday blog entry that the popular story suffers from a "framing problem".

The premise is that the Fed's decision earlier this year should fluctuate from its gradual, the interest rate increases to an attitude that now has investors ahead of interest rate cuts as soon as the end of this month was driven by fears that the interest rate had increased over the last three years, had abandoned the US economy on the brink of disaster.

Rum to run

Memani argues that the Fed & # 39; s far ahead of itself "by adding policies run by Philips Curve – the theoretical inverse relationship between inflation and unemployment. In December last year, Fed concluded The US economy slowed sharply while inflation was independent, justifying a decision to "get out of the stretcher."

Memani argues that the Fed just did the cautious thing and stopped the tightening before dragging the economy into the ditch. looks for the Fed to gradually relax "its last few increase in a cautious and methodical way", with economic conditions eased in the second half of 2019. Memani expects the economy to recover steam in the second half after a second quarter soft patch and resume annual growth of around 2%, so that stocks can rise despite modest growth in long-term US interest rates.


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