Don't look now fans, but good news appears to be good news again. And for investors trying to make sense of Ms. Market's game, this is also a good thing.
For years, investors have had to endure the concept of bad economic news being good for stock prices and vice versa. This seemingly perverse market reality was tied to the idea that more central bank stimulus was good for the market. Lower rates have historically been good for business and profits as borrowing costs fall and expansion becomes easier to fund. And of course, this makes sense from an economic standpoint. But from a stock market standpoint, the whole idea that a weaker economy will lead to higher stock prices due to lower rates tends to be a bit of a head-scratcher for many.
This all makes a little more sense when you factor in the idea that the market is a discounting mechanism for the expectations for future earnings. So, if the Fed is willing to lend a hand by buying bonds outright (aka QE) or cutting rates, the thinking is things will get better down the road.
But the bottom line is that after nearly a decade of global central banks intervening in every way imaginable, traders have learned how to play this game. In short, lower rates and more QE money has been a no-brainer trade for investors around the world. Conversely, when good economic news has shown up in the past, the worry was that the central bank gravy train trade might be in jeopardy.
The Game Is Changing
However, at this point in time, the game is clearly changing. Instead of bad news being good news because it gave the Fed ammo to maintain an "easy" policy stance, good news is now being cheered as a positive for the economy and the stock market. Imagine that.
Exhibit A in my thesis is yesterday's report from the NFIB on small business. The NFIB Small Business Optimism Index jumped 3.5 points in November to a reading of 98.4. To put this in context, the reading was the highest in nearly two years and the second highest seen since January 2007. And the November gain was the biggest monthly increase since April 2009.
The report indicated that respondents felt decidedly better about the outlook for the economy and the demand for their products. Expectations for business conditions in the next six months surged 19 points, which was also the best since April 2009.
It is worth noting that the upbeat sentiment in this report was also found in the Wells Fargo/Gallup Small Business Index and Duke University/CFO Business Outlook survey. So, in short, small business owners, who collectively have been relatively downbeat about the outlook for their businesses for years now, appear to have changed their tune and are now looking ahead to better days.
So, what did the stock market do with this information (along with other reports on the job market released yesterday)? Rally to new all-time highs, that's what. Need I say more?
If there is a "yea, but..." to this scenario, it is the recognition that the gain of nearly 9% in a little over a month may represent some over exuberance in terms of the expectations for the future. While it is true that stocks discount the outlook for the future, the current move has the look and feel of a "melt up." And the reality is that the current rate of ascent is unsustainable from a near-term perspective.
At the same time, I've witnessed many explosions to the upside in response to game-changing events in my career. And the one thing that has been consistent with these moves is that they last longer and go farther than anyone imagined - and all those "waiting for a pullback to buy into" tend to wind up frustrated and behind the curve.
So, what is the best game plan for underinvested these days? In my experience, the best approach is to make sure that you first have "something" to the game here (i.e. some exposure to the rally). From there, understand that if this move is for real, it will likely last a while. As such, one needs to be ready to add exposure on the dips - any dips.
Current Market Drivers
We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can both identify and understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).
1. The State of the "Trump Trade"
2. The State of Global Central Bank Policies
3. The State of Global Economies
Thought For The Day:
"The more we allow expectations to drive us, the further we push our potential away." Yehuda Berg
Wishing you green screens and all the best for a great day,
David D. Moenning
Chief Investment Officer
Sowell Management Services
Investment Pros: Looking to modernize your asset allocations, add risk management to client portfolios, or outsource portfolio design? Contact Eric@SowellManagement.com
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