This Hit TV Show Reveals a Hidden Truth about the Market

During these “dog days” of summer, while many of us are hiding indoors trying to beat the heat, film and TV producers offer a trove of blockbusters to keep us entertained. One of my favorites thus far this summer has been the third season of Netflix’s hit series, Stranger Things.

As I watched, I couldn’t help but see a connection between the show and the way the market is behaving recently…

If you’re unfamiliar with the series (I will try my best to avoid any real spoilers here), the basic premise is a group of plucky pre-teens struggling against evil creatures from an alternate dimension in 1980s Indiana.

That alternate dimension, known as The Upside Down, is in many ways parallel to our own dimension, with some very stark differences. While all of the buildings, roads, plants, etc. in our world are mirrored, everything that exists in The Upside Down has a dark, creepy, and obscured look to it.

And as the camera often illustrates, The Upside Down is just that – a version of our world turned on its head.

When we take a good look at the way that the market is behaving this summer, it wouldn’t be too much of a stretch believe that we’ve found ourselves in The Upside Down.

With the Renewed Fed Narrative, We Live in “The Upside Down” Market

Just like the parallel dimension in Stranger Things, market reactions are very different when the question, “What will The Fed do?” is the dominant narrative.

As an example, this past Sunday, the U.S. futures market opened and started trading down. Nothing drastic, mind you, but there was some selling as traders took profits after the strong run-up from the end last week. Here’s how it unfolded on the chart:


When the economic growth report came out from China – it was heralded as the lowest growth rate in three decades:


And despite this bad news driven by tariff-induced slowdowns, the market traded… up. So, it seems that bad news is good for the market.

Just in case that connection doesn’t click in your head, it goes something like this:

  1. When the Fed (and other central banks) are “accommodative” or doing things with monetary policy that support faster economic growth, that influence overshadows most other traditional market drivers, as we saw in the 2009 – 2017 run up in the markets. Those things central banks can do to facilitate economic growth include:
    1. Lowering interest rates (this makes it cheaper to finance new business investment – or to borrow money to buy back shares)
    2. Lowering reserve requirements for banks (this means banks have to keep less money on reserve and can theoretically loan more money for businesses to grow)
    3. Other stimulus dubbed “quantitative easing” like buying our own Treasury Bonds
  2. Because this monetary stimulus has such a strong effect on stock markets, things that might make the Fed act to provide additional stimulus make the market go up.
  3. Things that would make the Fed provide that additional stimulus are signs of a slowing economy – poor economic data.
  4. So when we get bad economic news, the markets react positively. And when we get good economic news, the markets drop.
  5. In short – good news is bad for markets and bad news is good. The Upside Down.

With that understanding, here are some major domestic and global events that I will be keeping an eye on:

  • Friday 7/26/19 at 8:30 a.m. – Preliminary GDP estimate. Most analysts expect a quiet report in the 2.75% to 3.25% range (bracketing the expected 3.0% number), but with weakness to come in the second half of the year. Again, it would take a surprise outside the range to move markets.
  • Tuesday 7/30/19 at 8:30 a.m. – The Personal Consumption Expenditure (PCE) inflation reading is usually lower than the CPI measure mentioned above, and the PCE is a favorite of the Fed. It’s expected to come in at 1.5% below the Fed’s target of 2.0%. So even an “expected” would be good news for the market.
  • European Union Consumer Confidence: Tuesday July 23 at 10 a.m. EDT – this number has been poor for a while, and is expected to show a continuing downtrend from -7.2 to -7.7. improvement would be a good economic thing, and thus bad for markets.
  • European Central Bank Interest Rate Decision: Thursday July 25 at 6:45 EDT. No interest rate change is expected, but much like the U.S. Fed, language of the statement will be parsed for stimulus-friendly language
  • China NBS Manufacturing PMI Tuesday July 30 at 8 p.m. EDT. The bigger number will come out 24 hours later (the China Caixin Manufacturing PMI), but since the two are closely linked and the NBS number comes out before the Fed rate decision, it will be the bigger market mover this time around.
  • Wednesday July 31 at 2 p.m. – Fed Rate Decision. All the previous bits and pieces lead up to this one.

For now, while we’re living in The Upside Down thanks to the market narrative centered on the Fed, markets will be moved more than usual by these announcements above. It means more volatility, but as long as no cascade of great economic data comes along (don’t bet on that), the market will continue its current upward bias.

Great trading and God bless you,

 

 

D.R. Barton, Jr.

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