What a Week: Goldilocks Returns

A sampling of any day's stock market reports provides inconsistent and conflicting reasons for a move up or down. One writer says stocks rallied on prospects of a rate cut, while another says stocks rose on evidence of a resilient economy.

Because the Federal Reserve doesn't cut rates unless the economy falters, the question is: What does the stock market want: rate cuts or a strong economy?

Turns out it wants both.

"The market wants to have its cake and eat it, too," says Thomas McManus, chief equities strategist at Banc of America Securities. Stock market bulls want a rate cut before the economic slowdown eats up any earnings growth, he says, but they don't want forced rate cuts (emphasize the plural there) based on a sharp decline in economic growth that would leave businesses struggling.

"At current valuations, stocks will suffer more from declining earnings expectations than they would be helped by lower rates," says McManus.

So, stock investors can't really say they don't want rate cuts, but they don't want three -- which is the amount of cuts arguably foretold by the yield on the 10-year Treasury bond. At least, three was the magic number prior to Friday, when the 10-year note fell 16/32 in price following a stronger-than-expected jobs report that prompted fed funds futures to ratchet down expectations for a near-term rate cut. (Treasury yields move in the opposite direction of their price.)