Why is the Equity Market Rising?
As concerns rise that we are headed for a recession, markets have been rallying upward. At face value this seems a bit confusing as a slower economy should be bad for business, right?
While a recession certainly does create negative pressure for companies, it does perhaps relieve some of the urgency the Federal Reserve might have been feeling to raise interest rates. I expect rates to continue to go up short-term. However, we may be moving towards a point when there might be a pause (or even a reduction of interest rates in the future) if the economy weakens significantly.
Market moves are often confusing, and this is one of those examples. Bad news can be good news. A slower economy and a possible recession seem like bad news. Actually, it might be good news for the market as oil prices fall, inflationary pressures are reduced, and the Federal Reserve possibly considers slowing its interest rate increase strategy.
A recent Kiplinger’s article highlighted this issue. In that article they stated:
“A recession implies trouble for investors. Many believe that once a recession is announced, the stock market will drop sharply – and so changes will be needed to their portfolios to weather the storm. But history indicates a different scenario. Instead of dropping further when a recession is officially announced, the market often moves up.”
Remember markets are a combination of data and sentiment and are not always rational. Sometimes markets react to short or long-term news depending on the intensity. That’s why understanding the dynamics of market psychology is so important in managing money. This is something that we assess as investment managers; we are not just focused on data but try to understand the sentiment as well.