With Taper Tantrum Behind Us, Can Good News Be Good News Again?

At its December 18 Fed meeting, the US Central Bank announced its plans to start tapering back its policy of purchasing treasuries and mortgage backed bonds commonly known and referred to as quantitative easing or QE. Starting in January the Central Bank will reduce its purchases of these securities to $75 billion a month, a reduction of $10 billion. Based upon a slowly recovering economy the Fed's intent is to announce a further $10 billion reduction at each of its eight meetings in 2014 which would result in eliminating the program altogether. As markets have relied on the stimulus program to support asset prices, potential withdrawal of the program was greeted with a certain amount of apprehension creating an environment where bad news was received positively by markets and good news was not so well received. A fair question is: As Fed policy normalizes in 2014 will the markets reaction to good and bad news do the same?

Good News is Bad for Asset Prices

Financial markets can be unpredictable and fickle things. One of the great conundrums of the last five years has been the notion of markets responding counterintuitively to economic data. The market participants that performed the best during the financial recovery were those who embraced the notion that weaker data would encourage an accommodative Fed which would provide more and more stimulus. This position required an iron constitution to accept and anticipate counterintuitive market behavior to varied economic data. And market behavior proved to be very unpredictable. In addition to being an "unloved" bull market by most investors, the equity market's rise was widely resisted as retail investors avoided equities while professional money managers resisted as well as shorted equities, which was a truly losing cause. The most disastrous results were from those managers who could not adapt to the idea that bad was good or good was bad. For tenured managers this shift was too overwhelming to acknowledge. Headlines of failed hedge funds littered the financial press each and every week for years. Predicting market behavior became first anticipating the data and then forecasting the market's response to that data, which is not a new concept but now it had a new twist. The only thing more bizarre than the market's response to data was the media's portrayal of how the market would react to data. End of month labor reports became circus-like with the multitude of analysts and professionals that CNBC and other financial programs would trot out and interview. All of the analysis and pontificating was based on a notion that weak data would keep the Fed on hold from removing liquidity from the market and helping maintain the bull market. The biggest fear became a large and positive labor report.

With the Fed's Decision to Announce the Taper, is it Time to Shift the Thinking Again?

Will the most successful money managers in 2014 be the ones that can go back to the old school way of interpreting economic data? If so, how and when will we know how the market is responding to the data? How many data points will we need to spot a trend? Based upon the equity market's reaction to the Fed's statement, it seems the market is ready to embrace good economic data again and reward the markets accordingly. To be sure, the reference to markets is equities, not all asset classes. Commodities such as gold have already weakened significantly and fixed income have suffered as yields have started to climb again after falling briefly. There was much revelry when yields did not skyrocket with the Fed's announcement. I think much is being made about this, when in reality, why should we be so confident that rates won't take their good old time to start to rise? One reason investors might point to a subdued yield environment is the fact that the Fed seemed very concerned about inflation, and more specifically, the lack thereof. The one thing that may scare the Fed more than good old fashioned inflation is not so good old fashioned deflation. As few outside of an economics classroom appreciate, deflation is truly a worrisome concept. In a nut shell, consumers stop consuming in anticipation of lower prices and the mechanics and benefits of debt break down with deflation. For a culture and society that lives for debt, this is debilitating. Japan in the 90s is the case study of deflation. Trust me, it's worse than inflation.

The Fed Soothed Markets By Assuring Them of Low Short Term Rates Forever (Hyperbole)

One of the things the Fed would like to accomplish is an ability to soothe markets more through guidance and commentary than through actual action. If the Fed is successful, it can accomplish its intended goals of assisting markets without the fear of unintended consequences of increasing its balance sheet. If the market accepts this approach and acknowledges the Fed's accommodative position, then good economic data can be interpreted as good for markets and vice versa. This can happen perhaps because without the market actually performing quantitative easing, the market can move away from the fear of losing stimulus and accept good news for what it is, an improving economy which should lead to improving financial markets: higher equity values and normalized interest rates.

Ironically, As Equity Markets Are a Discounting Mechanism, is There Remaining Upside?

As money managers are wont to do, equity forecasts for 2014 are naturally upbeat. Most range from modest, if any, growth, to the sublime of an additional 20% on top of 2013 gains. However, given the growth in equity values to date versus the modest GDP growth in the real economy, is good economic data just doing "catch up" leaving the equity markets flat in 2014? With most managers at the least acknowledging a fairly priced equity market, what room is there left for further short and intermediate term asset value growth? If equity markets continue to function as they always have, the improving economy has been long since priced in to todays values. Maybe what the markets are left with is that good news is just a sigh of relief and not an exultation or catastrophe.

Thanksgiving and Shopping: An American Tradition and Controversy

This Thanksgiving holiday brought with it a little more than just turkey, stuffing, and a serving of pumpkin pie. It also brought a mild bout of controversy. The decision by some retailers to open their doors before what is traditionally considered the start of Black Friday caused a bit of a national stir by some folks that believe Thursday should be sacred and kept to families crowding around their tables and their TVs for a feast and some NFL football. In hindsight it's hard to justify opening early when early retail results show customers only moved up their purchases by half a day and did not continue to buy throughout the holiday weekend. At least part of the rationale by these retailers for opening early is the late date of Thanksgiving and the loss of six shopping days this holiday season. It's unclear whether these "lost" days can be recovered this year or if they would make a difference any how.

The Race to Open Earlier

Walmart and Macy's are two of the more prominent retailers to open earlier on Thanksgiving and jump the traditional start of Black Friday door busting sales. To listen to some of the interviews by the CEOs of each of the retailers in their explanations for opening on Thanksgiving a tone of defensiveness could be detected. The CEO of Macy's, Terry Lundgren, indicated that his company was in the service industry and that his customers wanted the store open on Thanksgiving. In defending his company after reports of violence at some Walmart stores, U.S. CEO Bill Simon explained that out of the millions of shoppers hitting the stores during Black Friday, some incidents should be expected, and that not all of Walmart's customers are nice people. The spin is that this is the trend and it's what the customer wants. But who are these customers that are demanding that these stores change their hours to accommodate their shopping needs? And is Walmart competing with Macy's and vice versa? And is Walmart so egregious when Kmart opens at 6 A.M. on Thanksgiving?

Moving Sales Forward?

Empirical evidence seems to indicate that sales made on Thanksgiving may only have been brought forward from the traditional start of shopping on Black Friday. People interviewed outside of shopping malls over the weekend seemed to think foot traffic was no different than any other weekend. If this is true, do retailers really benefit from opening early? Do sales made on Thursday beat sales made on Friday? Some folks actually think they might. Based on Master Card Advisors' data and the finite amount of funds consumers allocate to shopping for the holiday season, getting first crack at those shopping dollars is critical to retailers. Studies seem to indicate that consumers will spend most of their holiday budget at the first two stores they patronize. This would seem to illustrate the importance of getting to customers before your competition.

Bad Publicity?

But does getting first crack at customers justify the bad publicity that some of these retailers received in the media over the holiday? In the case of Walmart, bad publicity seems to be a way of life. Between gender bias suits, near poverty level wages, and just plain poor public relations gaffes, such as having employees receive food donations from customers over the holidays, it seems no publicity is bad enough publicity for the retail giant. Based on the lines outside of Macy's flagship store in New York on Thursday, publicity seems to be anything but bad for this middle tier retailer.

Online Competition: Cyber Monday

As more and more consumers have access to electronic tablets, such as iPads and the sort, and become more comfortable shopping online, are brick and mortar retailers under more pressure to offer something the online retailers such as Amazon and eBay cannot? Does the retailer need to stress the shopping "experience" of being out with the kids and the family to compete with the online behemoths? As more consumers transact online, traditional retailers will need to fight back with their own online stores as a convenience and offer their stores as sites to pick up merchandise. Although the data in many cases is "top secret", it is widely believed that online sales still only make up a small portion of total retail sales. The combination of providing an online store and presence along with their brick and mortar stores seems to give the traditional retailers the advantage, for now.

What's It All Mean?

The world and the U.S. is undergoing a seminal change in how shopping and consumerism is transacted. If 70% of our economy is made up by consumer spending than the importance of this sea change cannot be underestimated. The rise of Apple's mobile devices such as the iPad are one big example of what is facilitating this evolution in consumer habits. As our habits change it is not surprising that big retailers feel the need to evolve as well. With regards to the traditional holiday season that means breaking down old boundaries once thought sacrosanct. There is no going back once we've moved forward. The irony of this consumer evolution: Will Black Friday and even Cyber Monday go the way of the dinosaurs?