TRADERS : A Typically Topsy-Turvy Transaction
Wall Street’s traders got some of the best news in years Friday: The nation had created a whopping 705,000 jobs last month.
Pop the champagne? Run out and buy that new Mercedes? No way.
Traders instead exhibited the topsy-turvy logic that has come to symbolize Wall Street, furiously dumping stocks and bonds. The absurdity was not lost even on those who inhabit their world.
“I’m old-fashioned,” says William LeFevre, senior market analyst at the brokerage firm Ehrenkrantz King Nussbaum Inc. “I say if the economy is improving, then the companies that make up the economy are also improving.”
But stock traders--somehow--decided the companies doing all the hiring were actually worth less than a day earlier. They sold, driving the Dow Jones industrial average, the stock market’s most widely watched index, down 171.24 points to 5,470.45 for its third-worst point decline ever.
Traders also dumped Treasury bonds, bills and notes, figuring an improving economy makes investments in Uncle Sam less attractive.
Understanding Wall Street these days is like peeling an onion, with alternating layers of logic and illogic.
Take the stock market. Traders sold shares Friday on the theory that economic strength would prompt the Federal Reserve Board to hold off on further interest rate reductions. (The Fed cuts rates to help stimulate growth, which it will not do if the economy is strong or inflation is rising.)
Those traders know that lower rates make borrowing cheaper, which helps corporations build new factories, hire more workers and produce more goods. So they figure the lack of lower rates will hurt companies.
Of course, if the economy is stronger and companies are hiring more workers--705,000, for instance--corporations are already doing better and have little need for cheaper borrowing. Their stock, it seems, should be worth more, not less.
“You can say we’re a bunch of hysterical manic-depressives, and there’s something to be said for that,” says Hugh Johnson, chief investment officer at First Albany Corp., a brokerage firm.
The reality, he says, is that the stock market is a coldhearted and fickle beast, not wanting the economy to be growing too fast but not wanting it to grow too slow, either. “It wants things to be just right. This is the world of Goldilocks.”
That theory is nothing particularly new. But Friday’s sell-off is one of the most poignant examples of the ghoulish good-news-is-bad, bad-news-is-good phenomenon.
Last year, for example, the stock market was a rocket, with the Dow industrials blasting through both the 4,000 and 5,000 marks. Meanwhile, economists and politicians were in a lather over the possibility the economy would drop into recession.
Another irony to come out of Wall Street’s Friday funk is how the stock market generally feels about jobs: Recently, it hasn’t seen a layoff it didn’t like.
