Saturday, December 5, 2015

Welcome Back, Mr. Spock

The popular Executive Officer aboard the U.S.S. Enterprise in the classic Star Trek was Mr. Spock.  He was known for his faithful worship of logic - the more pure, the better.  I expect he sold all his stock holdings long ago and got out of the market.  It became too illogical for him in 2008.

There was a time when the stock market behaved logically.  Good economic news made the stock market more bullish, and bad economic news made the stock market more bearish.  Then, there was the Global Financial Crisis of 2008/9, when central banks began directing the economy.  Everything changed.

The market reasoned that the central bank, (the Fed) would decrease its financial support, when good economic news was received.  This increases uncertainty, which the stock market loathes.  So, we got into a pattern of reverse-logic, i.e., good news = less Fed support = more uncertainty = lower stock prices.

Yesterday, something remarkable happened.  The Department of Labor issued its monthly "jobs report," and it was considerably better than anyone expected.  In other words, it was good economic news.  However, instead of going down, futures rose immediately, and the stock market roared all day.

The Reason:  The Fed has been hinting very loudly that it will almost certainly raise interest rates this month, which reduced uncertainty.  The Fed was removed from the equation.  Once again:  good news = higher stock prices.

It is akin to watching a distant nephew who finally "got his act together" and behaved logically, for a change - a refreshing change.  Mr. Spock would be proud!