When Good News is Bad News

I recently wrote a column giving a dozen reasons why the economy is doing better than people think. I could have added other positive signs. Consumer confidence is up. The value of the dollar has been stable. The retail sector is growing. Consumers have paid off some debt and, other than car loans, are cautious about taking on more. There are signs that Europe has bottomed and Asia is growing faster.

So why is the stock market behaving badly this month?

First, a disclaimer. I am not offering investment advice. I am not a financial expert and my IRA reflects this. I do poke fun at financial advisors. For example, on average, the stock market doesn’t do well in summer, giving rise to the adage “Sell in May and Go Away.” On occasion, I have explained this is because Wall Street bankers head to a place called the Hamptons each summer. They go there to party and to squander the obscene bonuses they still earn despite the Dodd/Frank Wall Street Reform and Consumer Protection Act of 2010.

So the reason your IRA always swoons after Memorial Day is because investment bankers are all hung over in the Hamptons until Labor Day (see the movie “Weekend at Bernies”).

Apart from their summer drinking habits, the other thing you need to know about investment bankers is that they are notoriously bad economists. They ignore warning signs, which leads to bubbles. Then they see good economic news as bad for the stock market. Right now, they are on FED watch.

One of the reasons the economy has been doing better is the Federal Reserve Bank has had a very accommodating financial strategy. Back when Gerald Ford was President, the FED noticed that Congress and the White House can get into hissy fits over the direction of economic policy. When that happens, the economy tends to stagnate or, worse, goes into stagflation. So the FED decided somebody in the room should start acting like an adult, and it began to intervene on one side or the other.

Since the near collapse of the banking system in 2008-2009, the FED has sided with President Obama and has been pumping billions in liquidity into financial markets every month. This has been driving conservatives in Congress crazy because they want Obama’s policies to fail. But bankers and investment advisors on Wall Street, who are already grateful that none of them went to jail in 2009, love the FED’s policy.

Their problem is that the economic recovery, albeit sluggish, is nevertheless gaining enough traction that the FED might ease up on its intervention. See what I mean? Good news for the economy may be bad news for the partiers in the Hamptons.

Just what that will do to your IRAs I can’t say, but it’s always good to err on the side of caution.