Are the Markets Rewarding Poor Performance?

On Thursday, September 12^th the Department of Labor reported Unemployment Claims that by all measures should have been stellar.  (292,000 versus 332,000 expected) yet the markets fell that day.  On Friday, September 13^th Retail Sales, Core Retail Sales, PPI and Core PPI were reported that were less than stellar and yet the Dow rose by 75 points.

It seems to me that of late whenever the markets report bad economic news it’s rewarded in terms of a market that gains as opposed to dropping yet no one seems to mind this nor do they think it’s unusual.  So what gives?  The prevailing mindset seems to be “well if the news is bad, the Fed won’t taper.”  It seems that this entire summer the question on everyone’s mind is “to taper or not to taper”?  Ever since the June FOMC meeting when the Fed made the announcement that they would taper based upon certain thresholds; some people want it sooner as opposed to later.  The mindset being that the sooner we know what they’ll do the less uncertainty the markets will have.  The other side of the coin is most traders don’t want the Fed to taper because they know that will mean less liquidity in the markets and the markets will drop.  Traders don’t usually like markets that drop.  According to Marketwatch  66 percent of investors believe that the Fed will announce a full taper on Wednesday, the second and critical day of the FOMC Meeting.

I take a different view.  I don’t think the Fed will taper because they know the economy is fragile at best.  They know this “recovery” is tepid and jobless.  If you need proof of this go to the Department of Labor website and look at the U6 rate.  The U6 rate is the percentage of total working population that is long term unemployed.  It is currently at 13.7 percent.  You might say that over time that number has decreased.  Yes that’s true but as compared to other recoveries that we’ve had, it isn’t coming down fast enough to make a noticeable difference.    You might say well the monthly unemployment numbers shown a decrease in the unemployment rate.  Yes, but that number doesn’t include the long term unemployed nor does it take into consideration the unemployed whose benefits have exhausted.  Those folks are considered to be “employed” by Department of Labor standards.  The Fed is all too aware of this and my take is they won’t want to do anything that will upset the economy more; like taper sooner as opposed to later.  They also know that sequestration and decreased government spending is taking a toll on this “recovery” not to mention the debt ceiling and budget battles that will be looming very soon.  Mind you, if the government doesn’t come to terms with the debt ceiling we will see at the minimum a partial government shutdown come October 1^st and when last I looked that isn’t too far away…

Nick Mastrandrea is the author of Market Tea Leaves. Market Tea Leaves is a free, daily newsletter that discuses and teaches market correlation. Market Tea Leaves is published daily, pre-market in the United States and can be viewed at www.markettealeaves.com  Interested in Market Correlation?  Want to learn more?  Signup and receive Market Tea Leaves each day prior to market open.  As a subscriber, you’ll also receive our daily Market Bias video that is only available to subscribers.