The market loves bad news again

Anticipating that the Fed will prolong its stimulus efforts, markets jumped this week on anemic economic news and so-so earnings.

Robert Johnson, CFA 26 October, 2013 | 11:24PM

With an anemic employment report and so-so earnings news, Wall Street is now firmly convinced that the Fed's raising interest rates and tapering bond purchases are now postponed until at least March 2014. The confluence of events noted above, plus a changing of the guard at the head of the Fed, a lack of clean economic data, furlough-related effects, and the Fed meeting schedule all seem to confirm the Street's intuition. The free-money-forever crowd loved the news and pushed both stocks and bonds sharply higher in the U.S. and around the world. For the most part, market participants brushed off several poor earnings reports, notably   Caterpillar  CAT. The market is one of its moods again where bad news is good news yet again.

World economic news couldn't stop the markets, either. The Chinese appear to be tightening credit yet again, withdrawing liquidity, and causing a jump in rates; sharply higher Chinese housing prices and growth in state-led investments are probably the cause of the tightening moves. Hopefully, the ensuing crunch won't prove as troublesome as the last crunch this spring.

Although the headline purchasing manager data for China showed some modest improvement to 50.9 from 50.2, that still isn't a great number, with the U.S. still showing a better reading. A number of Morningstar analysts, especially those covering technology companies, are talking about soft sales numbers for China that are continuing to worsen. Therefore, Chinese stocks have not fully participated in the free-money-for-all rally this week.

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Robert Johnson, CFA

Robert Johnson, CFA  Robert Johnson, CFA, is director of economic analysis for Morningstar.

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