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Strong US economic data does not automatically translate into good news for investors.
Photo:
Richard Drew / Associated Press
Good news, investors: you do not have to worry about the economy. Bad news: the Federal Reserve does not have to worry either.
The economy was buoyant in the third quarter, with the Commerce Department reporting Friday that gross domestic product had risen 3.5% a year. It was down from 4.2% in the second quarter, but a little better than the 3.4% that economists were looking for. Investment has slowed, but consumer spending has resumed, as the strength of the labor market continues to put more money in the pockets of Americans.
With the recent setbacks in the stock market, this could have been good news. But stocks fell on Friday, as investors reacted to disappointing results released after Thursday's closing bell, including from investors.
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Part of the problem: Although the United States is doing well, the economies of other countries, including China, are showing signs of slowing down. This is a challenge for multinational companies, which make a large portion of their sales abroad and also have to deal with the effects of a stronger dollar.
The other big problem for equities is the Fed, which plans to raise rates again in December and continue to raise them next year. The higher the rates, the less attractive stocks will be compared to safe alternatives such as treasury bills and savings accounts. In addition, for the Fed to achieve its objective by preventing the unemployment rate from falling to the point that the labor market is likely to overheat, it will probably not raise rates until the pace of hiring is over. cooled.
The other thing that could prevent the Fed from raising rates, is that the stock market continues to fall, but policymakers should be concerned that this downturn does pose a serious threat to the economy. As Ethan Harris, an economist at Bank of America Merrill Lynch, points out, the Fed is far less concerned about the economic fragility than in 2016, when it hit the pause button after a sharp decline in inventories. The drop in inventories also does not seem to be likely to shake consumer confidence – not with an unemployment rate of 3.7%.
Unless something really changes, the Fed will continue to raise rates and equities will have to fend for themselves.
Write to Justin Lahart at [email protected]
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