"If bad news is great for stocks, then is good news bad?"
Bank of America reminded us earlier that just this month, the PBoC cut rates, the ECB confirmed QE2, Sweden announced additional QE, and the BoJ promised additional easing if necessary 'without hesitation', and for markets, "the stimulus of October 2015 has worked, with equities and corporate bonds rallying hard."
The main driver of this newly unleashed central bank intervention? Terrible global economic data.
BofA further says that "central banks are easing because global growth is weak" (in the process making global growth even weaker but at least pushing risk assets to new highs) adding that "global profits are down 4% since February. Even the US has struggled: payroll growth has decelerated and the latest US GDP growth rate was a pitiful 1.5% in Q3. And the level of US inventories is unambiguously recessionary."
But while "confidence in quantitative success for the economy is nonetheless low" the 'loss of faith in central planning' trade which emerged briefly in late August and September, promptly fizzled as "don't fight the Fed" once again regained its top position on the pantheon of Wall Street aphorisms, right above BTFD.
So if terrible economic news is great for stocks, will the opposite be true as well, especially with a resurgent hawkish Fed and odds of a December rate hike soaring to the highest level yet?
Here are the five "good is bad" things which according to BofA, will change the narrative, and lead to a market selloff in November.
What changes this narrative? What signals Q3 was the trough for macro expectations? What causes a market sell-off in bonds in November? Strong October data & market validation of a higher rates/higher growth scenario in coming quarters:
- China PMI>50.5
- US ISM>52
- US payroll>225K
- US banks rally: XLF>$26 would confirm stronger “domestic demand” expectations.
- US dollar stable: if the Fed can hike without boosting dollar this is positive; DXY must not breach 100; a rally in ADXY (Asia FX index) above 110 crucial as this would erase the apocalyptic view of China growth prospects.
There is another potential adverse catalyst: while often cited as a source of market strength, the end of Obama's second term may be just the opposite.
The “Wall Street boom, Main Street bust” narrative is one central banks would very much like to avoid in 2016, especially as 2016 is a US election year. And it’s worth noting that the end of a two-term Presidential cycle has often signaled the end of an excess valuation somewhere in the global financial markets: the overvaluation of the US$ after JFK/LBJ, the undervaluation of bonds after Ford/Carter, the overvaluation of tech after Clinton and the overvaluation of housing after Bush (see Chart 7).
Will the S&P crash at the end of 2016? We won't know, but it certainly would be a fitting conclusion to Obama's second term if the stock bubble, the only thing Bernanke Yellen Obama "got right" and doubled it (at a cost of only $10 trillion in government debt), were to wipe out all its gains since 2009 and confirm to everyone just how naked the US president had been all along.