New Castle News

December 9, 2013

Mitchel Olszak: Observing the stock market prompts lots of confusion

Mitchel Olszak
New Castle News

NEW CASTLE — A casual observer of Wall Street may conclude investors in American stocks are insane.

Perhaps that’s because many of them are. Or at least their financial decisions appear to support this contention.

Last week, major stock indices recorded their fifth straight losing sessions on Thursday. Here’s a line from an Associated Press story that day:

“A record-setting run for the stock market has stalled in December as several signs of strength in the U.S. economy have emerged.”

Huh? Wouldn’t a stronger economy be good for the stock market?

For much of 2013, U.S. stocks have been on a generally upward trend. New highs in the Dow and Standard & Poors 500 indices were reached in late November.

This has come amid considerable uncertainty for the economy. Not only have statistics been relatively weak, but monkey wrenches ranging from the uncertainties of health care reform to government shutdowns to assorted international upheavals have intervened.

Yet now that there appears to be some solid evidence the economy is on the mend, the market sags. What gives?

Much of the answer, it seems, involves something called the taper.

As part of the effort to escape The Great Recession, the Federal Reserve has been buying up treasury bonds, to the tune of $85 billion a month. The intent is to keep interest rates low, theoretically spurring borrowing in the private sector and encouraging new investment and growth.

The degree to which this has worked is up to assorted economists and ideologues to debate.

Anyway, the Fed has signaled that it will begin to scale back these bond purchases when it sees evidence the economy can stand on its own two feet. This is the taper.

Thus, good economic news can translate into higher interest rates, which is bad for the economy.

Meanwhile, there is also concern that any taper will come too soon and cripple a weak economy.

It’s also worth noting that low interest rates tend to deter investments in bonds, certificates of deposit and the like. The stock market then becomes more attractive. That’s especially true when international markets are generally weak.

So in some circles, the Fed’s bond buying binge is seen as artificially inflating stock prices. If this buying ends, it’s reasoned, one result will be weakened support for stock prices. That’s a big factor in last week’s drop.

But then how do you explain Friday, when a report showing a drop in unemployment prompted a big runup in stocks? Wouldn’t that encourage the Fed to taper?

The explanation: Not everyone agrees on the short- or long-term impact of such news. This produces a tug of war in the market, that can be baffling to watch, so we shouldn’t make too much of it.