Good News

The way markets react to news is often instructive but frequently counterintuitive. News that seems good can drive stock prices down. Likewise, stocks often react to bad news by going up. Discerning the reasons for these things keeps armies of analysts busily employed.

Psychoanalyst Sigmund Freud is reputed to have said “Sometimes a cigar is just a cigar.” In the same way, sometimes good news is just good news. We have noticed several examples of this lately, and we suspect it may indicate some kind of turning point. Today, for instance, U.S. stocks gained for a second day after several positive stories hit the wires. Merrill Lynch (ML) announced its dividend is secure, the dollar rallied, crude oil pulled back, Ford (F) revealed an unexpected 1Q profit, and insurance stocks rallied. On the economic front, initial jobless claims dropped and durable goods orders rose. Add all this up and it is easy to conclude that the worst is behind us. The positive market reaction is itself another good omen.

Now for the caveat: much of the good mood is predicated on expectations that the Fed will signal a pause in its rate-cutting campaign after next week’s policy meeting. Today’s Wall Street Journal carried a story to this effect. Speculation surrounding the Fed meeting is why the dollar is rallying, while energy and commodity prices drop. If it turns out the Fed has other ideas, the mood could change quickly.