Sometimes the market masks bad news as good news. Using the Four Pillars of Investing and developing technical skills to analyze the market can help us avoid getting caught in the trap.
Medicine as a Metaphor
A while back, I was having pain in my back. I got an MRI and they told me that I had a herniated disc. I had played basketball for my entire life, and it was finally taking its toll on my body.
Before they were able to operate on it, they gave me medication to help me cope with the pain. The medication was a powerful narcotic, and the pain subsided enough that I could continue to function. I felt great!
But it didn’t fix the bad disc.
Is Medication Bad News or Good News?
Is receiving medication a sign of good news or bad news? Is it good news for a burn victim to come to the emergency room and receive morphine?
Being treated with medicine is good because it helps alleviate pain, yet it is always bad news to be hospitalized. Laying in a hospital bed means there is a problem, even if you no longer feel the pain!
Medicine in the Market
Much like this example of my herniated disc, we see instances in the market where “medicine” is used to ease the pain of a market stricken with problems.
The Federal Reserve uses two types of “medication” when there are problems in the market: quantitative easing and adjusting the rate. The main medicine being used in the economy today is the adjustment of interest rates. Rates have been lowered just barely above 0%.
The market has come to crave the medicine of low interest rates.
Last week, the Non-Farm employment report was released. The Bureau of Labor Statistics forecasted that we would have 246,000 jobs, but the reality was alarming: we only had 126,000 jobs.
This is terrible news because employment is one of the critical barometers to measure the success of the economy. A healthy economy increases the demand for more employees, therefore more jobs are created in the market. This job report shows that the market has a huge problem.
If the market were left to itself with problems like these, it would take a nasty dive. Using the “medication” of the Federal Reserve helps the economy bounce back and continue to function, even when it is having major underlying problems.
The treatment in response to this dismal job report is a renewal of lower interest rates for another six to nine months. They’re not going to pull us off our interest rate medicine quite yet.
Addicts of Market Narcotics
We’ve become like addicts to the lower interest rates. We don’t pay a lot on savings and it doesn’t cost much to borrow money. Businesses love this cheap money. Much like narcotics, low interest rates help us feel good about the market, even when there are big problems. We begin to crave that “high.”
But what if the employment report had been good news? What if there were actually 246,000 jobs, as predicted? This would have been an indication of a healthy market, which would have caused our interest rates to jump up. We would likely experience disappointment because we would suddenly be pulled off of our medication of low interest rates.
Finding out that the Bureau of Labor Statistics only reported 126,000 jobs is like finding out that I’ve got a herniated disc in my back. This is bad news! When the market is not producing the jobs that it needs to be healthy, it is major problem.
Taking narcotics to treat a herniated disc will only help alleviate the pain for a short time. Similarly, low interest rates may help us feel good about the market momentarily, but the market still needs to be fixed.
Recognizing Bad News as Bad News
We need to be aware of bad news being presented as good news so that we don’t falsely believe that the market is healthy.
It’s important to use the right tools to address this issue. I use the Four Pillars of Investing and develop my technical skills to analyze the market. Even when the market tries to convince me that bad news is good news, I can correctly identify the problems and know how to ride the market correctly.