NEW YORK (Real Money) -- Where the heck is it written that a better economy is bad for stocks? How did this become the perceived wisdom etched in stone, just unassailable in its logical imperative? It's in play every day, including today.
First, let's go over this gospel. We have had low interest rates for so long that many people, including commentators that come on TV all day, suggest that strength in the economy could be this bull market's undoing.
How do people arrive at this notion? On Friday we had a market that initially roared when we got terrific employment data, but then sold off as investors recognized that this hiring report was so strong that the Fed would have to move up its time frame for raising rates, regardless of previous statements. The economy's just too strong based on this number.
The flaw here? Over and over again the Fed has said it is data-dependent. The data include hiring but also include inflation, industrial production, wages and a host of other issues, not to mention worldwide progress in gaining growth. Remember, if the Fed said it was employment-dependent, it would be obvious that rates need to be raised right now. But the word data makes it clear that there's a plural here, and there are many reasons not to raise rates, including very little inflation and worldwide declines in the relative rate of growth, as in China or in the absolute rate, like in Latin America or Europe.
This Fed is not brain dead. We have had many a Fed that would have raised rates multiple times already based just on employment, and I think that would have crushed growth and strangled the nascent economic rebirth post the Great Recession.
Think, however, about how smart this Fed has really been. When oil was at $110 and apparently moving higher in June 2014, Janet Yellen dismissed the climb of this commodity as well as others as "noisy." She became the butt of many a joke by the hardliners who thought that her view was too dovish.
Amazingly, when she called inflation noisy, it happened to be the absolute top in oil and so many other commodities. Do you ever hear her get any praise for that gutsy call? Can you imagine if she had raised rates because of the inflation that so many thought was inexorably going higher? What an amazing save.
Let's dig deeper. What if the Fed raises the Fed funds rate to three-quarters of a point rather than a quarter of a point because the economy is gaining strength. That might ripple all the way through all bonds and send mortgage rates up, and make business and construction loans cost more.
Let's just say that we have had plenty of economic expansions with rates at 3%, 4% or even 5%. If the Fed took rates up to those levels in a straight line, I think that could pose a real problem for the stock market. But it's highly unlikely to happen. I see gradual increases at best, stopping each time to be sure that growth isn't being stunted by the Fed.
So, I am discounting the possibility of a quick return to higher rates given how prudent this Fed has been. Call it the "benefit of the doubt" complex. The Fed deserves it.
Far more important, however, is this incredible fear of growth that has sprung up after years of low rates. There are portfolio managers and pundits who simply believe that any strength in this key labor indicator is the death knell of the bull.
Yet, the truth couldn't be more different. Here's why. Take the incredible run of the retailers. If you just pick a couple of random retailers, namely Kohl's (KSS - Get Report) , Home Depot (HD - Get Report) , Wal-Mart (WMT - Get Report) and Dillard's (DDS - Get Report) , you know that these stocks have run. Why? Because of the prospects for a better economy. Remember how retail works. If the retailers think that their customers are confident, they will take in a lot of inventory, maybe expensive inventory, with big margins.
If they are right and the economy keeps expanding, they will make a lot of money, thereby justifying the big increases their stocks have taken. But if business turns down, the Fed raises rates and scares people and confidence erodes. The retailers will have to reduce the prices of what they bought in order to clear the goods. That will hurt profitability and the stocks will wilt. That huge cohort needs the economy to be strong to stay strong or get stronger.
Oh, and let's be clear that if the Fed were to raise rates to 0.75% or even 1% I don't think that would dent the sales if they continued at this pace.
Or just take today. Hasbro (HAS - Get Report) and Masco (MAS - Get Report) reported. The first represents totally discretionary spending and, unlike Mattel (MAT - Get Report) , it held up. Looks like Mattel's collapse was an execution issue; Hasbro did great.
How about Masco, the kitchen-and-bath supplier? Another terrific quarter based on American spending. That's not going to be killed by higher rates. If you are rooting for weakness to forestall the Fed, you could really hurt Masco.
The industrials are no different. I see Caterpillar (CAT - Get Report) hanging in and going higher. That can happen -- that can be sustained -- but only if the U.S. does better because there isn't enough growth overseas to make Caterpillar's numbers. The classic industrial could be saved by the U.S. even if rates go higher. If the economy hiccups now (and it won't if rates creep up), then CAT tests its low again and maybe doesn't hold.
Oil needs a stronger economy to meet the supply or it will go below the $43 level and we will be back into default land. Right now the oil companies can raise money in the futures market. They can catch their breaths and make deals to save themselves. But if the economy weakens, oil will roll back over. Even as gasoline could go still lower, I like this level: The consumer still has more spare change, and the destruction of the high-yield market by the possibility of defaults in the 18% of the junk in the market that is oil is diminished.
We are in the sweet spot because of hoped-for demand.
Then there's the 17% of the stock market that's made up of the financials. They almost all need higher rates. They are the least of your worries.
So, as the market goes lower because of worries about an economy that's too strong, remember this: Stocks have rallied from Dow 1,000 when I started in this business to Dow 17,000 and change, and the majority of those points occurred when the economy expanded, not contracted, even if the Fed did have to raise rates.
Yep, I totally get the fear of the Fed. It's ingrained by all of the commentators. And as the day of reckoning for higher rates occurs, be ready -- but be ready to buy, not sell, because history says growth and progress are positives for the market, and these times will be no different.
Editor's Note: This article was originally published at 3:05 p.m. EST on Real Money, Feb. 9.