While stocks retreated on Friday, following a confrontation on the Ukrainian border, equities pushed ahead last week. Part of the advance can be attributed to a perception, at least until Friday, that geopolitical risks in the Ukraine and Middle East were abating.
However, as I write in my new weekly commentary, “Where There is Value, There Are Investors,” last week’s market performance also proved that investors are having a hard time kicking a certain habit: treating bad news as good.
As the Federal Reserve (Fed) rolled out its easy money policy in the years following the 2008 financial crisis, investors became accustomed to treating weaker-than-expected economic news as a positive sign that the Fed would soon step in with more monetary stimulus.
But while the Fed plans to wind down its quantitative easing program by this October and most market watchers expect a Fed rate increase sometime during the first half of 2015, many investors still appear to be holding out hope for an even longer period of monetary accommodation, and such hopes largely drove last week’s advance.
Investors bid up stocks on the back of generally weak economic data, including another soft U.S. retail sales number, stagnating growth in the eurozone and slowing loan growth in China. For example, U.S. stocks rose sharply on Wednesday as investors interpreted weak U.S. retail sales as reducing the odds of an early Fed hike.
The common theme in all of these instances was optimism for either more aggressive monetary and/or fiscal stimulus, or, at the very least, a continuation of already easy monetary policy.
In my opinion, however, a change in the Fed’s intended monetary policy is unlikely, at least based on recent economic reports. While the U.S. economy does have persistent pockets of softness (such as household spending) and does face significant headwinds (like slow wage growth), it is generally improving. Though the U.S. economic recovery is certainly uneven, when you look at recent economic data overall, it’s evident that the recovery is gaining steam and that the U.S. economy has fully recovered from the first quarter’s economic contraction.