Mixed Messages

The past couple of weeks have been a time of mixed signals in the markets and news media. One day (or even one moment) the news is positive and the next it's negative. It's confusing and can leave one wondering just who's right, the bulls or the bears.

Stocks had staged a bit of a comeback earlier this month after the correction in February, only to go crazy again in the past couple of weeks. Seemingly all of a sudden stocks were back in correction-mode and many in the media seemed to turn bearish. This craziness and mixed messaging came to a head last week, with positive economic news being drowned out by a variety of negative headlines.

On the positive side, we had the first press conference from our new Fed chief, Jerome Powell. The Federal Open Market Committee (FOMC), which he heads, had just raised short-term interest rates again by 0.25%. This marked the sixth time the FOMC had raised rates since 2008 with all the increases happening since December 2015.

Why is this positive? Well, because Jerome Powell and the FOMC raise rates in response to a healthy and growing economy. This was also good news because of how the information was delivered. Maybe surprisingly, markets were watching not only for what Powell said but also how he said it. Did he look comfortable and poised and did he say anything stupid? Sounds crazy, right? But this is often the stuff that moves markets in the short-term.

Chair Powell did a fine job and his report was pretty good. Housing is doing well, he said, and the nation's unemployment rate is low and perhaps going lower. The tax reform law passed in December should be stimulative to the economy, although he's not sure when and how that will start showing up. GDP growth, one measure of the health of our economy, is being revised upward. Because of this he indicated the Fed would likely continue slowly bumping up rates as the economy continued to improve.

Also out last week was the Conference's Board's Leading Economic Indicators that showed more growth in February. This, and other variations on the data, is closely watched for clues about when the economy might start drifting toward a recession. These indicators aren't pointing to this anytime soon.

So, with this positive news why did stocks swan dive about 6% last week? While the stock market ends up coming back to fundamentals like corporate earnings and the health of the economy, in the short-term investors are always willing to yell "fire" if they think they smell smoke. In the last couple of weeks, and especially last week, there was smoke aplenty and it all seemed to appear at once.

First, President Trump's war of words escalated with his announcement of $60 billion in tariffs, aimed largely at China. This immediately stoked fears of a trade war in which, contrary to some opinions, nobody wins. The stock market doesn't care a bit about politics but when politics potentially impacts corporate earnings the market pays close attention. By itself this wouldn't have been so big a deal for the broader stock market. Unfortunately, there was more news to come.

Facebook's massive miscalculation about its user's interest in privacy shook the Tech sector, which accounts for almost a quarter of the S&P 500. The firm's stock declined over 10% in a matter of days and is now down about 18% from it's recent high. But again, this wouldn't ordinarily have been a huge deal by itself for the broader stock market.

Then in the same few days there was news of more staff turnover at the White House, grumblings of retaliatory tariffs from China, and that 60 Minutes interview coming up. Add it all together and you had the makings of a short-term headline-driven market freak out, or a "surge in negative sentiment" in analyst-speak.

And that's basically what happened. Stocks sold off across the board, with Tech and other sectors that had done well in the past year selling off a little extra as traders and investors took profits. Bonds were about flat, even with the interest rate increase that would normally have sent them down a bit.

And then after some positive news on the China/tariff/cooperation front, and maybe a remembrance that things aren't quite so bad as they seemed, stocks were up yesterday after hitting a key technical indicator. Go figure.

One takeaway from all of this is that there will always be something exciting in the news cycle that eclipses the often boring economic news the markets care so much about. Sometimes there will be many somethings all at once. But one of the tricks of being a successful long-term investor is focusing on what you can control instead of constantly being swayed by all the things you can't. We can control our allocation and rebalancing, our portfolio quality, our costs, our diversification and, frankly, that's enough.

Have questions? Ask me. I can help.

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