“If the Fed does hold off, the stronger economic data might be a mixed blessing for investors, who have been hoping for new action from central bank to stimulate the economy.” [i]

I love this sentence. It says so much about the psychology of the stock market in such a short space.

The sentence is part of an article highlighting indications of stronger economic growth. The chief worry seems to be that stronger economic growth may cause the Fed to hold off taking action designed to spur stronger economic growth.

Parsing this position is a challenge. Only in the investment markets would such a sentence even pass for analysis. It would seem a strengthening economy is what investors should desire. The recent improvement in economic data after a quarter long swoon is welcome news.

One of the statistics moving in the right direction is the consumer sentiment data. Data from 2012 shows a more optimistic consumer who is weathering concerns in Europe much better than in 2011. The article also sites higher job growth in July, easing layoffs, and resilient exports. Although growth is sluggish, it remains positive and suggests the U.S. economy slowly continues to heal.

There is nothing wrong with slow improvement. It doesn’t light up CNBC like an announcement of QE3, but it represents real improvements in the income statements and balance sheets of ordinary Americans.

So what did the authors mean by their seemingly circular logic? They meant that the market wants the short-term gains that come from sharp jolts of liquidity designed to manipulate the market. A market awash in liquidity is unlikely to experience a sharp, short-term decline. In essence investors are asking for some help from Uncle Sam, or in this case, Uncle Ben.

My biggest concern is the Fed will accommodate investors through further market manipulation. It is interesting that investors so willing to decry government intervention in most areas are so tolerant of it from the Fed. At some point, the Fed needs to let what they have done work and not pretend to manipulate a huge and complex economy like it is a puppet.


[i] Dougherty, Connor, and Ben Casselman. “Economy Notches Fitful Gains.” Wall Street Journal. N.p., 17 Aug. 2012. Web. 23 Aug. 2012. <http://online.wsj.com/article/SB10000872396390444375104577595102813626654.html>.

1242-CLS-8/28/2012