The “Alice in Wonderland” Stock Market; or,
Figuring Out What the Fed Will Do 

“The next level analysis is [determining] whether . . . good news is bad (meaning less accommodation) or good (economic improvement); or conversely, whether bad news is good (meaning more accommodation) or bad (economic deterioration).”

–Barry Ritholtz, “Predicting Jobs Data is Hard — and Useless, Too”; The Big Picture (May 3, 2013)

Flummoxed by today’s Fed-centric stock market (and broader economy)?

Not to mention quotes like Barry Ritholtz’s, above?

aliceHere’s my (relatively) simple key to filtering any and all possible economic news, and the effect it will have on stocks.

Four Scenarios

Scenario #1:  ‘Good news is good.’ Positive earnings, employment numbers etc. show a strengthening economy.  Good for corporations individually, stocks over all.

Scenario #2:  ‘Good news is bad.’   Positive earnings, employment numbers, etc. mean that the Fed will phase out monetary stimulus (= less accommodation).

Scenario #3:  ‘Bad news is good.’  Disappointing earnings, employment numbers, etc. will cause the Fed to intensify stimulus (= more accommodation).

Scenario #4:  ‘Bad news is bad.’   What’s that??

Detect a common denominator running thru the above?

“Gross” Advice

My other favorite take on today’s investing environment comes courtesy of Pimco’s Bill Gross, who just happens to oversee the world’s largest bond fund:

“The easiest answer to the question of what to buy is to simply take your ball and go home. If the rules aren’t fair, don’t play. That endgame however, results in [zero interest rates].  So a bond and equity investor can choose to play with historically high risk to principal or quit the game and earn nothing.”

–William Gross, “There Will Be Haircuts”; May 2013 Investment Outlook

Gross’ advice? (“gross advice?”):

“To continue to participate in an obviously central-bank-generated bubble but to gradually reduce risk positions in 2013 and perhaps beyond.”

Translation (my paraphrase):  “it’s better to be in the theatre then outside it . . . but stand near the exits.”

Update:  Based on today’s positive labor numbers and the market’s reaction, Scenario #1 appears to apply today.

About the author

Ross Kaplan has 19+ years experience selling real estate all over the Twin Cities. He is also a 12-time consecutive "Super Real Estate Agent," as determined by Mpls. - St. Paul Magazine and Twin Cities Business Magazine. Prior to becoming a Realtor, Ross was an attorney (corporate law), CPA, and entrepreneur. He holds an economics degree from Stanford.

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