US stocks are down this morning, apparently on news that the just-completed Christmas selling season was better than expected. The logic, if that’s the right name for this, behind the decline is that bond market pundits are concluding that the recession they’ve been (incorrectly) predicting for the past year+ is still not showing up. Their argument has been the straightforward one that lower rates will increase the price of already-issued bonds. To the extent that equities are also financial instruments with some percentage of bond in their DNA, lower rates would drive equity prices higher as well.

So today’s selloff represents a resetting of those expectations.

Personally, I think the notion that the Fed is wrong and that the economy is about to swoon–and the stock market to plunge–is crazy. 

Nevertheless, today’s market softness contains important information, I think. As I see it, the weakest stocks today are ones where the rationale for holding them is the most highly centered on the possibility for a substantial decline in interest rates. 

This is important information. How so?

If you think rates are headed substantially lower, soon, and your stocks are underperforming, today’s price action is confirming that you’ve set up your portfolio correctly. If you think, as I do, that macro conditions aren’t going to change that much, and you’re underperforming, there’s a good chance your portfolio has too little exposure to earnings growth and too much to the idea of quickly-declining rates.