Beware of good news avalanches

Saturday 21 August 2004

A huge amount of positive economic news came out last week – strong retail sales for the June quarter, very low unemployment and a bumper profit from Fletcher Building suggesting that the housing sector is going gang busters.

By The Landlord

Unfortunately, for share investors this avalanche of good news is unequivocally bad news.

There is no contradiction here, for there are clear negative consequences awaiting the economy as a result of what is happening at present.

At the beginning of any upswing, when there is lots of spare capacity in the system, good economic news is welcomed by the sharemarket. Rising retail spending and an improvement in consumer confidence or the property market at such a stage of an economic cycle is normally universally positive for shares.

But with the New Zealand economy as capacity-constrained as it ever has been, every piece of further good news increases the chances of a hard landing in the future. The raft of good economic news received should also remind investors that the current profits being earned by their companies are coming at a time of cyclical highs.

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