Commodity prices are plunging, the dollar is powering higher, Obamacare is collapsing, economies everywhere are faltering and terrorism is spreading across the globe.
That’s bad news. Unless you happen to be among the stock market investors who in the U.S. spent the last week bidding up stock prices like there is no tomorrow. They are playing with fire and are likely to get burned.
The Dow Jones Industrial Average (DIA) rallied 3.5% or 579 points to 17,823.81 while the S&P 500 (SPY) jumped 3.3% or 66 points back to 2089.17. The Nasdaq Composite Index (QQQ) added 3.6% to reach 5104.92.
Below the surface, however, market internals were horrible with anything energy related getting “schmeissed” in the words of legendary market guru Doug Kass.
And the high yield bond market, which we will get to in a minute, is even worse.
“Bad News Is Good News” Comes Roaring Back
It wasn’t just U.S. investors ignoring obvious threats to their financial well-being. Stock markets around the world rallied last week. Asian markets were up around 1.5% while Germany jumped 3.8%, London 3.5% and France over 2%.
The reason, of course, was the old “bad news is good news” idiocy that believes that the worse things get, the more central banks will do to prop up markets with more easy money. This was an odd reaction in the face of increasing signs that the Fed is getting ready to raise rates in December.
The Fed still has time to chicken out if markets turn south again, but investors decided to ignore the evidence of economic weakness to interpret signals of a coming hike as evidence that the Fed believes the economy is strengthening.
In view of the fact that the Fed has consistently misinterpreted jobs and inflation data throughout the Yellen years, this is not the conclusion I would reach or on which I would base investment decisions. The U.S. economy is not improving; it is faltering.
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