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Irwin Kellner Archives | Email alerts
April 10, 2012, 12:01 a.m. EDT
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By Irwin Kellner, MarketWatch
PORT WASHINGTON, N.Y. (MarketWatch) "” The stock market is behaving like it is Alice in Wonderland: what is good is bad and what is bad is good.
The market's fixation du jour is interest rates. As if rates were not low enough these days, the equities crowd wants to see them go even lower.
Not short-term rates, mind you; they are already close to zero. No, Virginia, I am referring to long-term interest rates, the kind you find in the bond market.
To give you an idea how much Wall Street wants rates to decline, traders sell stocks when something happens that suggests that yields will not fall; they switch to the buy side when rates do drop.
Sounds reasonable at first blush "” but it is not. This is because when interest rates do decline, it is for a reason that in the harsh light of day may not be necessarily good for stocks.
Rates can fall because the Federal Reserve deliberately pushes them lower by massive purchases of Treasurys as it did under QE1 and QE2. Then, the market rallied while the central bank's buying program was in effect "” but it fell once these purchases were completed.
Last week stocks swooned after the minutes of the latest Fed meeting suggested that the money mavens were not on the verge of embarking on QE3. Apparently officials believe that the economy is strong enough that it does not need additional support from the central bank.
The weaker-than-expected employment figures released last Friday only served to sour the market's mood on Monday. The Dow Jones Industrial Average /quotes/zigman/627449 DJIA -1.39% fell 1% to close below 13,000 for the first time in a month.
Bond rates can also decline if private investors buy bonds in the expectation that their prices will rise as their yields decline.
Whatever the case, both the Fed and private investors appear to be motivated by a rather dark view of the economy. The Fed wants to keep the outlook from getting darker while bond buyers apparently believe that the state of the economy already justifies lower rates.
Editorial page editor Paul Gigot gives his thoughts on the March jobs report.
In other words "” falling interest rates reflect an economy that is weak and getting weaker. And just in case you forgot, a weak economy usually means puny profits, less dividends and falling stock prices.
That said, you would think traders would be more anxious to sell than to buy when interest rates fall. You would be wrong, since they are doing the exact opposite.
The next question is why people buy stocks when rates go down.
Maybe they like the dividend yields that lower stock prices produce compared with what they can get on fixed-income securities. They might also be looking ahead to the stimulative effects of all that money injected by the Fed, along with lower rates.
But this is the future; in the here and now the economy is weak.
If traders are looking over the valley to the peak beyond, they had better be careful. The next peak could be further away than it looks.
Ever hear of Death Valley?
Irwin Kellner is MarketWatch's chief economist.
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Irwin Kellner, MarketWatch's chief economist since 1998, writes a weekly column on the economy and the financial markets. He has been a leading economist for... Expand
Irwin Kellner, MarketWatch's chief economist since 1998, writes a weekly column on the economy and the financial markets. He has been a leading economist for more than 40 years and previously served as chief economist for North Fork Bank, Chase, Chemical and Manufacturers Hanover. Widely quoted by the media in the U.S. and abroad, Kellner regularly addresses groups of business people and community leaders and appears regularly on Cablevision's News 12 Long Island. Collapse
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