Most global markets are responding positively to decent economic news today. We saw solid earnings from FedEx (FDX) and Nike (NKE) after yesterday’s close, which bodes well for the economy – everyone needs shoes, and everything needs to be shipped from one place to another. The rally was then turbocharged when the Conference Board reported a blowout Consumer Confidence number: 108.3 vs. a consensus estimate of 101.0 and up from last month’s 101.4 (which was revised higher from 100.2).
Today’s move is the flipside of our assertion earlier this month that markets were trading in “Recession Mode.” We noted that stock were reacting poorly to negative economic news even those items drove bond yields lower. Today we see the opposite. Good news is driving stocks higher, while bond yields reverted to only modestly lower levels after rallying about 10 basis points this morning before the Consumer Confidence report.
For many investors, this seems like a significant change. Well, it is. Liquidity-driven markets want to see the type of modest economic growth that enables earnings to grow without stoking inflation. That scenario – which prevailed for most of the last decade-plus – enables central banks to remain benign, if not accommodative. In case you hadn’t noticed, the world’s central banks are no longer benign, having flipped from highly accommodative to highly restrictive policies.
For a while, investors seemed reluctant to acknowledge the obvious. It’s hard to blame them. If a strategy has been working well for over a decade, it’s understandable the people with stick with it. Thus, even as rates rose rapidly, investors were still hopeful that the Federal Reserve might pivot back to accommodation or at least flip to a neutral stance. Yet they have repeatedly stated their desire to raise rates to a level that they deem sufficient to fight inflation, even if it risks employment and economic output. In other words, a recession.
It appears that investors have finally digested that message, at least for now. If the Fed is willing to risk a recession in order to fight inflation and in no rush to cut rates anytime soon, then investors need to hope that the economy can remain robust enough to deliver solid earnings. The triple-whammy of better-than-expected earnings from FDX and NKE (they’re actually both down sequentially since last month, and in FDX’s case, versus last year too) and the positive consumer sentiment offer substantive reasons to be hopeful today.
Last week we wrote: “At some point … equity investors will need to decide which is more important to them – easy money or a decent economy. Odds are we’re not getting both.” For today, at least, they have decided that a decent economy is more important. Let’s see if that persists into the start of the new year.
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