Bad economy? Stocks don't care

Despite signs of weakness and investor pessimism, equities and other risky assets keep marching higher

By Anthony Mirhaydari Jul 17, 2012 4:06PM

Stocks recovered Tuesday from the deep early session losses resulting from Federal Reserve chairman Ben Bernanke playing coy in Congress about new stimulus measures. There were also lingering concerns over Monday's dismal retail sales report. Yet traders continue to bid up risky, economically sensitive stocks and commodities as if nothing's wrong. What gives?


As I've been writing in recent columns and blog posts, investor sentiment has become too sour and small futures and options traders have taken extreme bets that stocks and other risky assets are headed lower. They have good reason to worry. America approaches a "fiscal cliff" of tax hike and spending cuts worth nearly 5% of GDP. The eurozone remains a mess. But none of that seems to matter.



All I know is that buying is happening. And it's robust. Measures of the market's technical strength and breadth continue to improve. Cyclical, high-beta areas like regional banks and packaging companies are breaking higher; taking the reins from the biotechnology/pharmaceutical stocks that led the way higher in June.


There could be any number of justifications for this. The most likely is that weak economy data only supports the Fed's case for more action. Or that with bond yields so low (10-year Treasury yield is at 1.5%), and the resulting equity cost of capital so low, stocks are a screaming deal even if corporate earnings growth is slowing. Or that climate-induced crop failures and political tension in the Middle East will ignite another bout of food and fuel price inflation, pushing down the dollar and bolstering the prices of things like crude oil, copper, and other commodities.


Yes, the economy is in trouble. Just look at the retail sales report. Philippa Dunne at the Liscio Report looked back and the historical data and found long streaks of negative retail sales growth were not only quite rare, but harbingers of trouble.  Since the ex-auto sales series began in 1967, there have only been five other instances of a three-month losing streak for both the total and ex-auto sales. That's out of 543 months, so less than 1% of the time. Four of the five were in 2008. And the fifth is now.


Looking at three month streaks for total or ex-auto, these have also been rare. The predecessor for the modern total retail sales series started in 1947. Since then, there have only been 29 other three-month losing streaks (3.7% of the time). All but two have been in recession or within three months of one.


Clearly, this isn't good news. But investors are looking past that. Weaker economic data will bolster the Federal Reserve's justification of additional monetary policy stimulus. Indeed, Paul Ashworth at Capital Economics today noted that while June's retail sales report is just a single data point, it "may be the one that proves to be the tipping point that persuades the Fed to launch a third round of quantitative easing."


Trading update


I am adding paper packaging company Boise (BZ) and regional lender First Horizon National Corporation (FHN) to my Edge Letter Sample Portfolio. Exisiting positions continue to do very well with Spectrum Pharmaceuticals (SPPI) up 33% and Nektar Therapeutics (NKTR) up 33% and 26% respectively since I added them in the middle of June.


Disclosure: Anthony has recommended BZ to his newsletter subscribers.


Check out Anthony's investment advisory service The Edge. A two-week free trial has been extended to MSN Money readers. Click here to sign up. Contact Anthony at anthony@edgeletter.c​om and follow him on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.

Jul 17, 2012 5:17PM
It´s actually just the Wall Street lobby. Even if QE3 comes, it will do nothing for the real economy. Interest rates are already at historic lows, financial cost is not the problem nowadays. The Congress is not willing to act to change structural features of the economy and the global environment is just as terrible. It leaves the QE advocates to cheer for it and for the formation of another bubble, once more.
Jul 17, 2012 4:43PM
Thanks for the laugh. The attempts to explain away the fraud which constitutes today's NYSE is priceless. As Mencken said "nobody ever went broke underestimating the intelligence of the American people."
Jul 17, 2012 6:04PM

It's actually quite simple Anthony and I'm sure you really know why.  There's absolutely no reason to sell into this market!  If good numbers and data comes out then the market rally's, if bad numbers, data, and earnings come out then the FED is there to simply mention QE and the market rally's.  It's a win win and one of the greatest manipulations the FED has pulled off, and they have done a bunch.  Funny how not much has gotten better in this economy except for wall streets wallets and inflated companies stock prices.  When this game falls apart it is going to be an epic disaster but nobody cares...Risk on!!!

Jul 17, 2012 6:00PM
"Bad economy? Stocks don't care"

Looks like a bubble in the works. Ignore the basics, wish that the Fed will pay the way.


Remember the housing bubble, ignore the price, wish that housing prices would never peak.



Jul 18, 2012 1:37AM
The Stock market is a total disconnect with reality. 
Jul 17, 2012 5:35PM


Wait till January when we start loosing about about 200,000 jobs per month for all of 2013 when the cuts to defense start killing the entire defense industry. We will see how many Bulls there are left. If Congress and Obummer don't get something done soon we are headed where no man wants to go.

Quantitative easing will no good in the face of the losses to the economy that are coming soon. The last 2 rounds of QE just put off the inevitable anyway-they really didn't stimulate anything except our debt.

We need to get rid of Bernanke and Obama and everything connected with either one of them and even that may not be enough to stop the fall.

Buy guns,ammo, food, and survival gear. You are going to need it.

Jul 17, 2012 10:45PM
There is one problem here and that is a bad economy can and will kill companies. Good luck buying zombie companies.
Jul 17, 2012 9:28PM
NO - I will take it out on "hard working" Americans.  Wall Street is a reflection of capital allocated based on our economic actions.  Unfortunately, WE / YOU have allowed government to become more involved and therefore distort the capital allocation process.

If you are just working and voting economics, you will eventually be enslaved.   A strong economy is a by-product of FREEDOM.  Economics is not a value or even a valid ethical issue.  Determine your politics on something else. 

Get out of the urban rot culture and go back to the farms from which your families came generations ago that produced something of real value.

Jul 17, 2012 7:40PM

Where did all these pimps come from? Do they get like a dime or something for every posting.

Guess the economy's even worse than i initially thought.

Jul 19, 2012 3:25AM
Markets that ignore reality eventually come crashing down to reality. 
Jul 18, 2012 6:30AM
Tony-- I don't think anyone IN stocks can sell them. The first to begin cashing out prompts all of the others to do so... all the way to ZERO. Also, I think there are massive shorts in play waiting watching for ultimate decay. That arena should be seized and reconciled. Refund all actual money used to buy shares- incarcerate everyone naked and borrowed. Reconciliation reveals corruption, likely resolves all crises.
Jul 18, 2012 3:43AM

Speculators don't care about the ecomony!


Romney doesn't care about Americans!


Same thing!


Obama in 2012!


Van Hollen in 2016 & 2020!

Jul 17, 2012 5:41PM

Stocks keep rising because they are still cheap and earnings are not going down.  The only way for stocks to go down at this PE is if earnings started to decrease.  Earnings have not done that yet (they have flattened out a little, but not gone down), nor will they unless/until the "fiscal cliff" kicks in.


That's way, despite all the doom and gloom talk, stocks will remain strong for the next several months.


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