Wednesday, December 04, 2013

Bizarro World

Today's headline of the day so far goes to this clever wire writer

"S&P 500 gains for 1st day in 4 as Nov. ISM non-manufacturing missed estimates"

The whiplash inducing reaction of the market to every piece of data is bound start causing problems at some point.

Consider the following just from this morning:

* The trade deficit came in better than expected and stocks dip.

* The ADP jobs data (which I admit is a horrible indicator on the BLS jobs data coming on Friday) came in much stronger than expected.  Obviously, this means stocks should ....... fall further???  Huh?

Why would that happen? Again, the computers that run the market read headlines like "better than expected" and instantly equate that to "the Fed may stop open market purchases" which means stocks are destined to fall.  This is OVERLY simplistic but it does represent much of the thinking on Wall St.

At 10am, the ISM services number came in weaker than expected and everyone (silicon and carbon-based) started buying everything that wasn't nailed down.  Stocks swung back to the upside.

I contend that the Fed is not watching every little data point.  They have (or should have) a 3-5-10-20 year vision and they do know that their involvement in markets has to end at some point. The question is really when do they signal their intentions to the market?  Everyone expects this will happen in June 2014 and that they will be able to jump ship before things turn.  If however, the Fed uses major data points like unemployment and jobs creation, they could shock everyone by moving sooner.

One final, caveat - the Fed is a non-political entity but the political implications of their decisions are very real.  2014 will be a very hotly contested mid-term election cycle and crashing this Fed fueled stock market in the middle of the run-up to the election would complicate matters for both parties.

Cheers!

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