Good news is good news again

Wall Street’s surge to a fresh record suggests investors are becoming used to the idea of a reduction in Fed stimulus.

Stronger US economic data and a corresponding gain on Wall Street overnight may suggest US equity markets are becoming comfortable with the prospect of tapering. The Dow crossed the 16,000 mark to close at a record high.

Recently it has been a case of “good news is bad news” as markets have been sold off on any positive economic news, amid the overarching fear that the taper is close at hand.

Before going any further it must be noted that Janet Yellen also edged one step closer to being confirmed as the next chair of the Federal Reserve. However, it would be reasonable to conclude the market has already largely considered and priced in Yellen’s forthcoming appointment.  

The fact the global economy is in the best shape it has been for years may explain the change in the market’s response to positive economic news. Global growth this year was disappointing and with 2014 offering more promising forecasts, corporates have something to look forward to.

Expectations are the US and China will continue to do the heavy work, carrying the global economy forward. Combine steady growth with negligible inflation, and the outlook for the New Year is really one of the best we have seen in years.

Of course, political risk could disrupt the best hopes for economic growth. But risks on this front appear to be abating – it is unlikely that Congress will want another fiasco like October.

For now, loose monetary policy will continue to support the price of risk assets. Since the Federal Reserve blindsided the market in September by not tapering, risk assets have climbed higher, with US and German indexes smashing all-time highs. Conversely, other assets traditionally bought for their safe haven status, such as gold and commodities in general, have posted losses. 

Domestically, the rally spanning the last 18 months has largely been driven by easing concerns over a Eurozone crisis. However, a rise in corporate earnings is still very much required. As earnings have been revised higher over the last few months, it is more likely that Australian corporates will be able to deliver. Reporting season kicks off in February and will be the market’s best opportunity to actually assess the numbers.

A less violently negative response to positive US economic data looks to put equity markets on the front foot for the year ahead.