Sign in
Become a MarketWatch member today
Mark Hulbert
Feb. 19, 2010, 12:06 a.m. EST · Recommend · Post:
View all Mark Hulbert "º
"¹ Previous Column
Corporate insiders' buying picks up
First Take "º
Dell's desktops get no love from Windows 7
By Mark Hulbert, MarketWatch
ANNANDALE, Va. (MarketWatch) -- In the looking-glass world known as Wall Street, there may actually be a silver lining to stock index futures' drop in the immediate wake of Thursday night's surprise discount-rate hike.
By falling, futures traders signaled that their primary preoccupation today is different than what it was as recently as several months ago. In contrast to then, when their major worry was whether the economy would soon slip back into a recession, stock investors now seem to be more worried about whether higher rates will make stocks less competitive.
After all, the surprise discount-rate hike means that the Federal Reserve is convinced that the economy is even stronger than many had previously thought -- strong enough, in fact, to tolerate an accelerated exit strategy. ( Read full story about the Fed's decision to raise the discount rate.)
You'd have thought that investors would celebrate and drive stock futures higher.
The reason they didn't: The stock market's level had already taken into account the economic strength that is only now being tacitly recognized by the Fed.
Note carefully that it therefore would have meant something entirely different if stock futures had instead risen strongly Thursday night in the wake of the discount-rate hike. Such a reaction would have signaled that investors remain gravely worried about the health of the economy, eager to grasp onto any straw in the wind that indicates the economy may be stronger than thought.
Though this reasoning may strike you as something straight out of Alice in Wonderland, researchers have long recognized that the stock market's reaction to economic news depends on where we are in the economic cycle.
Consider a study several years ago that examined the market's reaction to unemployment news, conducted by finance professor John Boyd of the University of Minnesota, Jian Hu of Moody's Investors Service, and finance professor Ravi Jagannathan of Northwestern University. (Read the study.)
The researchers found that when the economy was in recession -- as later determined by the National Bureau of Economic Research, the official arbiter of when recessions begin and end -- the stock market typically fell when the unemployment news was reported to be unexpectedly bad. But when the economy was in an NBER-declared expansion, more often than not, the market rallied.
The reason the market reacts differently during recessions than during expansions, according to the researchers: When the economy is growing, the positive effect of a strong jobs report is more than outweighed by the negative effect of the interest-rate hikes that such a report makes more probable.
Just the reverse is the case following a weaker-than-expected jobs report. Now the bad news of the jobs report is more than outweighed by the good news that the Fed will have less pressure on it to raise rates.
During recessions, in contrast, interest-rate hikes are less of a threat. So a strong jobs report is taken at face value as good news, and a weaker-than-expected report is considered to be bad news.
It is of course too early to tell whether weakness in the overnight futures market will carry over into Friday's trading. Many traders are openly acknowledging that they are still analyzing the Fed's announcement and what it means for the markets.
But, with early precincts reporting, the reaction of futures traders would appear to suggest that the economy is on stronger footing than many had thought.
Mark Hulbert is the founder of Hulbert Financial Digest in Annandale, Va. He has been tracking the advice of more than 160 financial newsletters since 1980.
- fx61 | 12:45 a.m. Today12:45 a.m. Feb. 19, 2010
While Hewlett-Packard Co. chief executive Mark Hurd is probably sending boxes of chocolates up to Redmond, Wash., Michael Dell probably wants to throw rocks at Microsoft Corp.'s sprawling campus.
5:18 p.m. Feb. 18, 2010 | Comments: 22
Vancouver stock-picker gets the gold
Media Web
NY Times learns yet another lesson
On the Markets
Parsing reaction to Fed's surprise move
Ways and Means
How well is your 401(k) plan serving you?
Tech Tales
Microsoft tries to get past its mobile baggage
Vital Signs
States grapple with insurers' rate hikes
View from Jerusalem
Euro's travails have only just begun
Read Full Article »