How Good News Can Be Bad

Yesterday, there was a series of economic data that was released that was viewed as positive data. In response, the Dow Jones Industrial Average dropped about 190 points or about 1%. Does this make sense?

The key data was related to housing starts, new home sales, consumer confidence, and investor confidence in the economy. For the most part the data came in at or near expectations and showed fairly strong outlook in these areas, which are relatively critical measures of our economy. A strong and stable economy should be a positive for equities.

So why did the market drop? In as simple of an explanation as possible, its all about the Fed. Positive economic data has turned into negative news for the market. The perception is that if we continue see positives in the economy, the Fed will be more likely to raise rates, sooner. And this is viewed as a negative for the equities markets.

However, if you look at the bond market’s response, little was changed yesterday. I believe bond investors have already priced in any anticipated action by the Fed. To me it looks like the bond market is no pricing any near term expectation of a higher Fed Funds Rate or that any anticipated movement will not have substantial long-term impact on valuations for bonds or equities. I think the bond market is showing a bit more patience to potential Fed action, or showing disbelief that substantial Fed action is coming soon.

So, what do we make of this? Well, no one knows exactly what is coming and when. I think the best course of action is to remain disciplined and focused on individual goals. An appropriate asset allocation and diversification strategy will help you see beyond the headline du jour and the volatility that follows.