Bad Economic News Continues To Be Good News For The Equity Market. However, The Numbers Are Wrong.
U.S. firms add fewer jobs than expected. The economy continues to cool. Investors continue to interpret bad economic news as good news for the market, the thinking being that as the economy slows, the probability of the Fed lowering its Fed Funds rate increases (low interest rates push asset values higher, including equities). However, the numbers don’t add up.
I do not believe the Government’s CPI figures and what they imply. For example, Headline CPI sits at 3.2% while Core CPI is 4.0%. Now, let’s look at today’s ADP release - average annual pay was up 5.6% year-over-year. This suggests that real earnings (earnings less the impact of price inflation) are positive. That is to say that annual pay is growing faster than inflation. If that is true, why is the economy slowing? Why does the U.S. economy not feel robust?
The answer of course is that the Government’s CPI figures are bogus. They are heavily massaged as I covered in TEK2day Podcast Ep. 448 (HERE on YouTube, and below. I begin discussing CPI at approximately the 5 minute mark). For the record, I believe ADP’s numbers to be largely accurate. The U.S. economy continues to slide deeper into recession and the equity market eventually will not like it.