Bad Economic Data But The Stock Market Goes Up

Over the last couple of weeks, there have been a couple of occasions when the stock market has gone up despite being presented with awful economic news. This is a very bullish sign. After all, the stock market is a pricing mechanism for future economic growth. Since October 10, all three major stock indexes have moved sideways. This pattern, called a "base" by traders, is frequently preparatory to a bullish change in trend.  What does the stock market "know" that newspapers are ignoring?

• On December 5th, the stock market zoomed up 4% following reports of record home foreclosures in the 3rd quarter and a loss of a half-million jobs during November.
  
• The stock market gained 1% on Friday, December 12th after Thursday's report of a 26-year high in unemployment claims and Friday's report of falling retail sales.

Not all of the news from the retail front was bad, however. Retail sales fell 1.8% in November but excluding cars and gasoline, sales increased by 0.3%. This was the largest increase since June and the first since July.  Reduced sales figures from gasoline stations is also positive because it reflects the dramatic drop in energy prices.

Unemployment has increased recently in the face of massive corporate layoffs. This is bad news, but it is also a lagging economic indicator. Companies don't layoff workers at the first whiff of financial trouble because it is time consuming and expensive to rehire workers. Likewise, when financial conditions start to improve companies wait to rehire until they are confident that the upward trend will continue.