IN FOCUS: Trending – Don't fight the Fed

Posted on Sep 2, 2014 :: Features
Posted by , Insight on Business Staff Writer

So far this year, the Bureau of Economic Analysis released four estimates of growth in the U.S. gross domestic product. The first three, which measured first quarter growth, started at 0.1 percent and dropped to -2.9 percent. During this time, the S&P 500 gained 4 percent.

The fourth GDP estimate was released on July 30, and the bureau reported an estimate of 4 percent growth in GDP for the second quarter. During this time, the S&P 500 dropped 3.3 percent. As can be seen, markets fell on good GDP numbers and rose on bad GDP numbers. History shows that markets should rise on good economic data and fall on bad. But why is the opposite happening?

In short, it’s because of the Federal Reserve. The promise of economic stimulus is a powerful influence on market growth. Fed Chairwoman Janet Yellen has repeatedly remarked that if economic health declines significantly, the Fed will step in to increase its stimulus program for the economy. This is important, because evidence shows a high correlation between the S&P 500 and stimulus spending. Therefore, if the economy receives stimulus because of bad economic news, investors will expect the S&P 500 to rise in step with stimulus spending. If the economy improves, the Fed will continue to decrease stimulus spending and then the market is free to act on its own accord without any predictability.

This month, clearTREND® analyzes the commercial real estate and shipping & logistics sectors along with U.S. economic health. clearTREND’s Economic Health IndexTM shows its most favorable reading of the year, with 81 percent of U.S. sectors expanding.

“Fundamental analysts must be scratching their heads,” says Alex Haas, advisor to private clients and retirement plans. “It normally would make no sense that markets would be rising on negative economic data and falling on positive data. However, it has been made clear that stocks will rise as long as there is an expectation for additional stimulus.”

Click here to view this month’s economic data in our digital issue.