An excerpt of a column from today’s WSJ, Not Too Fast, Not Too Slow caught my attention:

“But last week, at least, investors looked past that kind of worry. Widely followed Wall Street economists were telling clients that even a significant economic weakening might actually be good for stocks.

“If we could have a hard landing but not a recession, I think that would be a favorable outcome for the financial markets,” says economist Ed Hyman of New York research and brokerage house International Strategy & Investment. Should the Fed start to worry that it has slowed the economy too much, Mr. Hyman says, then it would have to cut rates sharply. Investors would welcome the rate decline as a boost to growth, consumer spending, the housing market and profits.

What Mr. Hyman and many economists fail to realize is that if we get a hard landing we are also going to see corporate profits take a hit. And as far as I know, profits are much more important to share prices than the Fed funds rate. Besides, the last time the Fed cut rates the stock market continued to fall.

Mr. Hyman also states, “History tells me that a significant weakening in the economy and a crisis-induced reversal of Fed policy could make this stock market move up dramatically.” But the same column looks back at history and sees something else:

“Trouble is, although they get talked about a lot, soft landings rarely happen. Going just far enough but not too far — and doing so during an election year and amid conflicting economic signals — is one of the hardest things for monetary-policy makers to do. They almost never have succeeded.

Since the mid-1970s, almost every time the Fed has pushed rates higher, it has created a recession, a bear market or both. The notable exception came in 1994 and 1995, when the Fed raised rates without causing either, but did blow up the bond market and tank the Mexican peso. It looked as if the Fed might achieve another soft landing in the late 1990s, but then came the tech wreck and a deep bear market.”

As the economy continues to slow, I actually expect the market to rally higher in the short-term based on this misguided thinking that the Fed can save the economy by lowering rates. But any rally will be short-lived and would make an excellent shorting opportunity.