The Week Ahead: Sell the Rumor, Buy the News

“Buy the rumor, sell the news!” Market gurus often echo this well-known bit of wisdom. In the current economic situation, we would reverse the quote and say instead, “sell the rumor, buy the news.” In this case the rumor has been that recession is on the way, despite the Federal Reserve Chairman and the President’s advice to the contrary.

The stock market has listened carefully to this rumor, and has sharply corrected from October 2007 highs. Over the past few months, economic data has offered validation of the rumor in evidence that recession might finally have befallen us. So, is it time to close our eyes to troubling data and buy into the news? Perhaps the more important question is have we really received confirmation of the rumor yet? Recession has not been confirmed.

There are three general views of our economic situation and outlook that are painted by various economists. The majority of economists see recession possible, and economic slowing likely. This group also expects the economy to begin to grow again by year-end. This group, let’s call them The Consensus, would likely say you should buy stocks when bad news draws no more sell-off reaction. The thinking here is that seller exhaustion finally sets in. Then eventually, economic stimulus should drive recovery and stock market rise.

The second group of experts, let’s call them the Armageddon Economists, would tell you that this credit market crisis we are now experiencing, combined with the inflation environment, offers a unique and destructive path for the economy. The third group of strategists is composed of optimists who believe prices will back up due to global economic slowing, and that a recession might still be averted.

While current economic troubles are very unique and concerning, I have faith in an intangible factor. The economy has mitigated significant problems already, and done so through diligent efforts of government and private sector alike. We believe the problem solving human mind will continue to find resolution where it might not immediately be apparent. For this reason, we find fault in the Armageddon viewpoint. Its basis rests on a presumed stagnant economic factor, human creativity, and by definition that’s already proven false.

The Week Ahead

Wholesale Trade (Jan.) on Monday and Business Inventories (Jan.) on Thursday will offer insight into the condition of inventories on the wholesale, manufacturing and retail levels. We have noted in the past the long-term trend of decrease in inventory-to-sales ratios. Enabling technologies and learned efficiencies have driven just-in-time production-to-delivery processes that have significantly improved inventory management, and thus improved our economy’s ability to emerge from economic trough.

Tuesday’s International Trade (Jan.), Thursday’s Import & Export Prices (Feb.) and Friday’s Consumer Price Index (Feb.) will offer a fresh look at inflation. It’s near critical to the market to see some easing of price pressure, but at the same time this seems unlikely at this juncture.

The week ahead offers noteworthy earnings reports from: Monday – Hovnanian Enterprises (NYSE: HOV), Jones Soda (Nasdaq: JSDA), The Blackstone Group (NYSE: BX); Tuesday – Dick’s Sporting Goods (NYSE: DKS), Take-Two Interactive (Nasdaq: TTWO), Kroger (NYSE: KR); Wednesday – JA Solar (Nasdaq: JASO), The PMI Group (NYSE: PMI); Thursday – Aeropostale (NYSE: ARO), Churchill Downs (Nasdaq: CHDN); Friday – AnnTaylor (NYSE: ANN) and more.

Comments

[Yokohama Kid]

I stick to the first group The Consensus simply because I believe investors have overreacted to credits-related situation with economic data they found least attractive in the past 5 years or so, thereby exacerbating sell-offs. Election year also has helped them think and visualize the economic situation and outlook deteriorating when only slowing down. Whatever measures US Government and Fed have taken so far and will come up with will drive the economy upward by the end of this year.

[johnthebear]

You may call it rumor... but the markets anticipate coming events that affect the economy and put a face on it for all to see. That is why the market is going down regardless of those who only hold rear view mirrors and are unwilling to look forward as to what is likely to occur. Wishful thinking will not make your stock go up.