When bad news is good
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September 18, 1996: 5:40 p.m. ET
Wall St. hopes for negative economic news to influence the Fed's decision
From Correspondent William S. Rukeyser
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NEW YORK (CNNfn) -- The Federal Reserve board meets next Tuesday to decide whether to raise interest rates. Between now and then, many on Wall Street are hoping for a healthy dose of bad news about the economy.
Why bad news? Because what's bad for the economy is often good for the markets.
For example, an increase in factory orders, rising consumer confidence and surging new home sales all appear to be good news --but not for stocks and bonds. They fell sharply during the days following the releases of those three reports.
Syndicated columnist George Will thinks he knows why the markets reacted the way they did.
"Will's law of economic news is that all news is economic news, and all economic news is bad," he said.
On the other hand, bad news can also be good news. When the government announced last week that 21,000 new faces turned up on the unemployment lines, the news helped send the Dow Jones industrial average to a record high.
These apparently perverse reactions are usually ascribed to traders' fears that when the economy grows, the Federal Reserve may feel the need to raise interest rates to ward off inflation. Higher interest rates depress the prices of bonds and stocks.
So should individual investors learn to hate good news, just like a bond trader? Not according to Fed-watcher David Jones.
"Wall Street is always nervous, always looking at the latest number and trying to draw sometimes extreme conclusions from it," said Jones, vice chairman of Aubrey G. Lanston & Co. "It's simply wrong for the individual on Main St. to try to adjust a portfolio in line with these sometimes exaggerated fears that Wall Street might have."
Jones's advice if the Fed does change interest rates: leave your stocks alone.
Wall Street traders are often flighty because their time horizon is often minutes or hours. And even though they are spared the commissions that individuals have to pay, many of them lose money.
"I think individuals have generally been the solid players in these markets, particularly as they've come into the mutual funds," Jones said.
So if you hear this week that business is good, feel free to smile.
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