Dollars and Sense: Mixed economic news hasn't hurt the stock markets--yet

Bad news is good news. The stock markets keep setting record highs, but the economy itself seems to be sputtering. The explanation is pretty simple: Government manipulation in the form of artificially low interest rates, with a strong assist from the bond-buying quantitative easing scheme. The market rise has been a classic example of the supply-and-demand curve. The supply of money increases, so its value or price decreases, and the things that it can buy—such as stocks—go up in price. That’s why the markets are at record high prices and why bad economic news continues to be good news for the markets, since bad news means the Fed likely will keep interest rates low.

Not sustainable. You may have heard the old saying, “If something can’t last forever, it usually doesn’t.” That is exactly the situation we find ourselves in now with the stock market, though how the situation will resolve itself is not clear. It’s now been more than six years since the beginning of this rally. The Dow has climbed about three-fold, and we’ve not seen a significant correction. That’s unprecedented. Also unprecedented is the fact that the national debt crossed over $18 trillion recently. A growing number of people are saying a 10 percent correction is long overdue. And with the Dow at 18,000, a 10 percent correction will be a nearly 2,000-point drop, a real jolt. No one knows precisely when that jolt will occur, but the current situation can’t last.

Tepid growth. We got news on Friday morning that the economy actually shrank in the first quarter. The Commerce Department said gross domestic product (GDP) shrank 0.7 percent in the first quarter. Analysts said weather was a major factor. We’ve seen a rebound since the first quarter, but that drop was more than expected and it throws a monkey wrench into already mediocre projections of 3 percent growth for the year. Two percent GDP growth for the year now seems more likely, and that’s weak indeed for an economy that is supposed to be in a recovery. By the way, since the Fed started issuing projections of GDP growth in 2007, it has been consistently wrong, almost always overestimating future growth.

Wall Street and Main Street. U.S. house prices rose 0.9 percent in March to take the year-over-year advance to 5 percent, according to the S&P/Case-Shiller index, released last Tuesday. Mergers and acquisitions remain in the news, with the announcement that Charter communications will buy Time Warner Cable for $55 billion in a cash and stock deal.

Around the world. The situation in Greece remains fluid. We keep hearing news that Greece and its creditors are close to a deal, but we keep NOT seeing that deal. China got a boost last week when officials in the Chinese government started leaking news that it was on the verge of relaxing more financial market regulations. In particular, cross-border sales of Chinese mutual funds are expected to fuel the flow of cash into the country. That’s another move by China into the mainstream of the world’s economic activity.

The week ahead. We’ll start getting May reports soon, including the big report for the month—unemployment—which comes out on Friday. With earnings season behind us, and this unemployment report still days away, we’re likely to see the markets in a holding pattern this week. But I would continue to keep an eye on Greece. We’ve already seen a flow of capital from the United States to Europe. A deal in Greece could be a boost to the European markets, and that boost likely would come at the expense of the U.S.

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