Business News

Economy up, market down. Que?

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by Peter Switzer

The market reaction to better-than-expected US economic news reminded me of Manuel from John Cleese’s Fawlty Towers, whose limited grasp on the English language meant that he often responded to questions or directions with “Que?”

Of course the confusion isn’t based on the English language but on economic/market behaviour where Wall Street headed down despite better-than-expected news on the economy.

For the record, the Dow lost 119.96 points, or 1.03 per cent, to wind up at 11,493.57 while the S&P 500 finished at 1204.42, down 14.47 points or 1.19 per cent.

The good news

So, what was the good news? Try this:

The August Institute for Supply Management’s manufacturing reading came in at 50.6, which was above the expected 48 result and any number over 50 means this important sector is expanding.
Chain store sales were up 4.4 per cent despite the threat from Hurricane Irene.
Claims for unemployment benefits fell, though this was only a weekly number.
Auto sales in August were up with Chrysler experiencing a 30.6 per cent rise in sales, GM 18.2 per cent, Ford 11 per cent and Hyundai 13 per cent higher. Toyota and Honda were down but these stories were linked to supply problems in Japan post-tsunami.

The main game

By the way, there were some bad news items such as lower construction figures and weaker-than-expected manufacturing data in Europe but the main game was going to be ISM’s manufacturing data.

It was 50.6, which had to be a good sign that a US recession was less likely, yet the market sold off. As Manuel would ask: “Que?”

Well, it gets down to the perverse thinking of traders. If the economy can avoid a recession under its own steam then the Fed will avoid QE3 which would flood the economy with money, boost demand and help companies make profits, albeit on less valuable US dollars. Also, the lower dollar will help US production and exports in particular.

Rally ahead?

So, this sell-off today could be a good sell-off as it could be the start of the US proving that no recession is coming and when that becomes certain the stock market will rally, probably in the fourth quarter.

The next big test is the job numbers tomorrow and I have no view either way but I’m hoping on a great one, but I’m not putting any new money on it.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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Published on: Friday, September 02, 2011

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