Confused? Bad News Sends the Dow Higher

Ever since the Federal Reserve announced its preliminary plans to exit its quantitative-easing program, investors have changed their previous views that the Fed wouldn't do anything that would allow the economy to slip back into recession. Today, though, some of the old enthusiasm came back into the market after first-quarter GDP was revised from 2.4% down to 1.8%, inspiring confidence that the Fed won't start tapering its bond-buying program as soon as many had feared. With the old "bad news is good news" paradigm seemingly back in effect, the Dow Jones Industrials (DJINDICES: ^DJI  ) has posted a triple-digit gain in early trading, up 106 points at 10:55 a.m. EDT.

Among Dow stocks, Boeing (NYSE: BA  ) has powered the Dow's gains, rising more than 2% after customer British Airways took delivery of its first Dreamliner aircraft. Even with the time frame for Dreamliner deliveries having been derailed by the aircraft's battery problems, airline companies appear to remain committed to the fuel savings and other efficiency benefits that Boeing's newer aircraft offer. With trillions of dollars of new orders expected in the coming 20 years, Boeing only needs to demonstrate its ability to make good on its order backlog in order to reap huge gains.

Some stocks aren't taking part in the rally, though. Alcoa (NYSE: AA  ) is down 1%, suffering along with the commodity-metals markets. Gold and silver have plunged again, hitting three-year lows in the face of perceived pressure from changing central-bank policy. For Alcoa, meanwhile, low commodity prices mean sustained plant closures and capacity underutilization, forcing impatient investors to wait even longer for a long-hoped-for cyclical upturn.

Finally, outside the Dow, for-profit education company Apollo Group (NASDAQ: APOL  ) has sounded alarm bells once more, falling 5.4% after reporting disappointing enrollment figures. New enrollment dropped by nearly a quarter, and investors ignored earnings that topped expectations after accounting for one-time items. Given the regulatory attention that Apollo and its peers have gotten lately regarding their marketing practices and concerns about students' ability to repay student loans, the entire industry seems trapped by pessimism. The fact that Apollo is getting kicked out of the S&P 500 only adds insult to the injury of its plunging stock price in recent years.

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  • Report this Comment On June 26, 2013, at 12:32 PM, grahamsway wrote:

    The "bad news is good news" thesis should probably scare any reasonable investor a lot.

    Just about everybody pretty much understands that the Fed big purchase experiment is going to very likely end badly.

    So the idea of them continuing to add huge amounts of low coupon paper to their balance sheet somehow being supportive to anyone except the high frequency traders is a bit weak.

    If continuing the Fed program is probably not sustainable, but tapering is bad, and stopping completely is terrible, an investor might want to carefully consider what the end game actually looks like.

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9/27/2016 4:45 PM
^DJI $18228.30 Up +133.47 +0.74%
AA $9.65 Down -0.03 -0.31%
Alcoa CAPS Rating: ***
APOL $8.04 Up +0.33 +4.28%
Apollo Group CAPS Rating: *
BA $131.32 Up +0.75 +0.57%
Boeing CAPS Rating: ****