Bad News for the Economy Means Good News for the Stock Market

Global equity markets surged overnight on the back of deteriorating manufacturing data out of the US, China and Europe. Yep, you heard that right. Continuing on the theme of recent months, bad news for the economy means good news for the stock market. That’s because bad news for the economy means more activity from the world’s central banks…twisting, manipulating and shoving the economy in a direction it doesn’t want to go.

But wait! Didn’t the gold price collapse last week because of an improving global economy, meaning a gradual end to QE and rising interest rates? That was the story fed to us through the mainstream press, anyway. No matter that it was nonsense. It simply sought to explain the unexplainable.

Which is pretty much how things are on a daily basis these days…unexplainable in any rational manner. Not a lot makes sense. Of course, the market is ALWAYS right in the very short term. But with the glorious benefit of hindsight it is often wrong, as John Hussman illustrates with this classic chart, below.

It’s a comment on sentiment and human emotion via the ‘headline effect’. Barron’s magazine is a Wall Street bible. Twice a year it conducts the ‘Big Money Poll’ of professional investors. As Barron’s reports:

‘In our latest survey, 74% of money managers identify themselves as bullish or very bullish about the prospects for U.S. stocks an all-time high for Big Money, going back more than 20 years.’

That’s pretty bullish.

How have only slightly less bullish prognostications fared over time? Well, Hussman shows us three instances when big money snorted wildly. In 2000 after the tech bubble peak (hence the Barron’s cover title ‘Still Bullish’), in 2007 just prior to the credit crisis, and now.

As Hussman writes of today’s sentiment:

‘Rule o’ Thumb: When the cover of a major financial magazine features a cartoon of a bull leaping through the air on a pogo stick, it’s probably about time to cash in the chips.’


Without having read the Barron’s survey, we’d guess that the majority of big money managers are bullish because, well, they have to be. It is just too much business risk to be bearish when central banks offer free liquidity and seemingly underwrite all forms of risk.

That it will all go pear-shaped at some point is not in doubt. But if you’re bearish for a few quarters and it doesn’t go pear-shaped in that timeframe you start to see fund outflows. You start to underperform the index and may even lose your ‘big money manager’ status.

So the tendency for big money is always to be bullish. It’s good business.

Meanwhile, in the real world, economic deterioration continues.

Yesterday we learnt that the initial reading of manufacturing activity in China in April reached a two month low of 50.5, below expectations and down from a reading of 51.6 in March. (A reading above 50 signals expansion.)

The Australian market ‘shrugged’ that one off yesterday, because the prospects of more stimulus and the dividend payout policy of our largest energy company (Woodside) is more important than the deteriorating health of our largest trading partner. At least it is until it isn’t.

And overnight, we learnt that manufacturing activity in Europe remained stuck in the doldrums, with a reading of 46.5, while in the US the index fell to its lowest level in six months, with a reading of 52.

Global markets ‘shrugged’ that data off too. The rally had all the signs of another short squeeze. The bears are getting run out of town. Being bearish now is a lonely place to be…just how we like it.

Greg Canavan
for Markets and Money

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Greg Canavan
Greg Canavan is a contributing Editor of Markets and Money and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to Markets and Money for free here. If you’re already a Markets and Money subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Markets and Money emails. For more on Greg go here.

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