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Don't tell me good news could ruin this rally!

Peter Switzer
28 August 2015

By Peter Switzer

Another leg up for the Wall Street rally was hampered by a new ‘problem’ — the US economy looks better than expected! Sorry to tell you that good economic news might be bad stock market news but it’s possible.

At this point you have to be saying: “Hang on, it was bad economic news out of China that sent stocks down, so why would good economic news out of the US not be great for stocks?”

Yep, this is the logical conclusion but there is a fly in the ointment. You see, the Yanks got themselves a second quarter revision to their economic growth figure and it came in at a very attractive 3.7%.

How good is this? Well, the first reading was only 2.3% so this is an entirely new story. It’s a great new story, which instantly made some share players think: “Wait a minute, could the September rate rise be back on the table!”

This revision was even more attractive given final sales did really well, so it’s hard for naysayers to poke holes in the beauty of the make up of this number.
Of course, good economic news should mean stocks rise, eventually, as it says US companies will book higher profits but, in the first instance, the first rate rise could cause some market consternation. In fact, some experts have argued some of the recent share price collapse was pre-rate rise negativity.

I’d also throw in the fact that poor economic news out of China, plus US rate rise apprehension, on top of the fact that it was 996 days (on my counting) since the US stock market had had a correction (where indexes dropped 10% or more), were behind it all!

That was double the average wait for a significant sell off of these healthy market adjustments, so the share market drop was way overdue.

But wait, there was more good news to add to the Fed’s rate rise consideration info.

The oil price was up 10% after the US revealed lower-than-expected crude oil inventories.

Energy stocks will do well in Australia today. Of course, there would be some short-covering in this price spike for oil but still it will help energy stocks and our index.

On top of this good news for stocks, US pending home sales were up 0.5% and jobless claims fell for the first week in five.

This all came together as the Shanghai Composite was up over 5% at the close and in Europe, get this, the business morale reading in France rose to 100 in August, the best level in four years. Don’t you love the French having a morale index?

The rate rise fear partly explains why the Dow lost ground from its 385-point rise earlier in the trading day but what was really encouraging was the re-rise of the market going into the closing bell.

That could be saying that the lovely threat of really good economic news will cancel out short-term silly worries about the US starting a rate-rise cycle with a small lift in interest rates.

What? Is good sense prevailing in a stock market? Hard to believe but I’ll take it if it’s on offer.
By the way, the Dow actually rose into the closing bell to be up almost 370 points. Maybe good news was good news after all!

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