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When Good News Isn’t So Good

By Robert Frick on October 29, 2015

I can’t remember if this was a joke or a scene in a sitcom, but the setup is some guy is in a coma on a hospital bed, and the punchline is: At least his color’s good.

Relatively speaking, I guess that is a positive. And I was reminded of that joke Wednesday when the Fed again didn’t raise interest rates but indicated that things are not bad—the Fed’s version of our color is good. Specifically, the Fed statement said the labor market will continue to improve and inflation will eventually rise.

The world is holding its breath for the Fed to raise rates, even a little, as a validating sign that we’re finally returning to a normal economy seven years after the financial crisis.

The New York Times extrapolated that the Fed’s “concern about the global economy has diminished.” It came to this conclusion in true Kremlinology fashion, by inferring something based on what the Fed didn’t say. In September the Fed said it was worried about global strains—presumably China’s slowing economy and deflation in Europe.

After the October meeting, that language was “stripped” from the announcement, said the Times, “leaving only the acknowledgement the Fed ‘is monitoring global economic and financial developments.’”

In investor psychology there’s a bias called anchoring. It means we tend to use reference points, or anchors, when making judgments. Salespeople know this works like a charm, as they set the initial price of a car or house high, for example, knowing a buyer will eventually pay a higher price due to anchoring.

(When you negotiate for a raise or to buy a car, make sure you’re the first person to set a price—drop the anchor first—because studies have shown you’ll end up with a better deal.)

When it comes to the economy, we’ve been stuck in little or no growth for so long that we’re anchored to low expectations. Even the hint that some economic heat will arise gets the media and many investors excited that happy days are here again.

Last month when the Fed didn’t raise rates and said the employment outlook was looking up, I wrote in the September 18 Mind Over Markets (“The Fed Shows Its Hand”) that employment isn’t as rosy as it seems.

This month I’d like to point out that the global economy isn’t looking so hot, either. And as our analyst Martin Hutchinson points out, “If Europe is so strong, why is Mario Draghi, the president of the European Central Bank, about to increase Europe’s quantitative easing next month?”

Says our chief investment strategist for our Canadian Edge newsletter, Deon Vernooy: “The best I can say in terms of a global economic view is we seem to be muddling through. That means below-par growth and ongoing low inflation.”

Richard Stavros, our chief investment strategist for Investing Daily’s Global Income Edge, has proven to be a shrewd prognosticator of global trends, bringing his subscribers strong yields from strong companies in the United States and around the world. When I asked him for his take on Europe, he said despite some encouraging news “the recovery there is still weak, and European export industries could be hurt from downturns in emerging markets.” Richard thinks “the overall picture is tangible improvement as Europe rebounds from its previous zero-growth levels.”

That is positive, but remember anchoring. Don’t read more into Richard’s assessment, which is still, sure, Europe’s improvement looks relatively good, but it’s nothing to write home about. Richard is careful about overseas companies, and the ones in his portfolio must pass his strictest standards.

Likewise, Jim Pearce and Ben Shepherd, who manage Personal Finance’s Growth and Income portfolios, respectively, exercise a comparable caution these days. So when some truly positive signs appear, remember not to think the economy is back on track because we’ve been anchored to low expectations for so long.

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