There's more evidence today that Wall Street is still firmly fixed in "good news is bad news" mode. Piece of good news No. 1: a 5.2 percent increase in monthly sales of existing homes. Piece of good news No. 2: The Labor Department reports that 302,000 workers applied for jobless benefits last week, down 11,000 from the week before and the first decline in a month. Wall Street's reaction: Stocks slide moderately lower.
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So, why the negative attitude? It's simple. Investors are interpreting good economic news as making it more likely that the Federal Reserve will continue to hike interest rates. Indeed, the Federal Open Market Committee convenes next week with Chairman Ben Bernanke at the helm for the first time, and most Fed watchers expect policymakers to lift the federal funds target rate by another quarter percentage point to 4.75 percent. Now, it's not so much that rates are high on a historical basis—they're not. It's more the case that each time the Fed raises rates, the move ratchets up investor anxiety about a collapse in the housing market—and a resulting collapse in the economy.
But economists Brian Wesbury and Bill Mulvihill of First Trust Portfolios make a contrary case worth noting: "Yes, rising interest rates are beginning to take their toll on mortgage applications (down 14.2 percent in the past year), but this is not a one-star team. Demographic trends, a robust economy, rising wealth, and favorable tax policy are long-term factors that should continue to support housing activity. As a result, we are not worried about a national collapse in the housing market. We expect existing-home sales will remain near the 6.5 million to 7.0 million level for most of this year, and price appreciation will pull back to around 5 percent."
