by Jamie Hyndman, Mawer Investment Management
Remember the first time you heard that red wine and dark chocolate might actually be good for you? What a wonderful experience to find out that something previously thought to be a negative is actually a positive.
The stock markets have also been doing their version of bad is good lately. While conventional wisdom states that good economic reports spur on equity markets while poor reports incite damage, the exact opposite is happening.
A weak GDP number, falling employment, sagging consumer confidenceā¦and voila ā markets rally. Why is this happening? Because market participants are expecting poor economic readings to extend central bank stimulus measures, such as keeping interest rates low, and buying Treasuries and mortgages.
To us, this is inverted logic. Think about it. To want poor economic data so that the central bank stays heavily involved in manipulating the economy is just perverse. This is short-termism at its worst.
True investors want to see the economy prosper in the long term and to do so on its own accord, not with constant central bank meddling. While Keynesian economics likely has a role to play in deep recessions, there is a limit to how far (and long) it should go.
Be careful what you wish for ā bad wonāt be good forever. If bad continues for too long, bad will just be bad.
Jamie Hyndman
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