Stocktake: Is good news bad news for stocks?

The ECB and Bank of Japan, unlike the Fed, are not under pressure to communicate tighter policy

The Federal Reserve building in Washington, DC. US stocks were back at all-time highs last week. Photograph: Andrew Harrer/Bloomberg

The Federal Reserve building in Washington, DC. US stocks were back at all-time highs last week. Photograph: Andrew Harrer/Bloomberg

 

For investors, good news is bad news at the moment – or is it?

It depends on what part of the world you’re talking about, says Schwab strategist Jeffrey Kleintop. The Federal Reserve recently dialled up its economic expectations for 2021, Kleintop observed in a note last week, a development that prompted the worst weekly market sell-off since February.

Just as investors cheered weak economic data in 2020 on the basis it implied easier monetary policy, they took fright at the possibility that strong economic data will force a tighter policy and accordingly weigh on stocks.

However, Kleintop argues, things are different outside the US, where inflation pressures are much less intense. Unlike the Fed, the European Central Bank and Bank of Japan are thus not under pressure to communicate tighter policy, which means good economic data “is likely still good news for these stock markets”.

Well, maybe. Divining the market mood isn’t easy. US stocks were back at all-time highs last week. Why? “Economic optimism”, according to one headline.

John Maynard Keynes famously compared the stock market to a beauty contest where you profit not by selecting which face you think is the prettiest, but by guessing who others will think the prettiest. Betting on whether good news is actually bad news or whether we are still in a “good news is good news” market is a bit like Keynes’ beauty contest – it’s an entertaining but unprofitable activity.

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