Bad is Good and Good is Bad
The S&P 500 gained a modest 1.5% this week, giving back by Friday almost all of the 6% two-day gain from Monday and Tuesday. The market has moved into a period where bad economic news is good for the stock market and good economic news is bad for the stock market. The rally to begin the week was triggered by the relatively weak manufacturing and jobs reports, and Friday’s drop was triggered by the relatively strong employment numbers. This counterintuitive result is due to one factor: inflation.
The market is looking for signs that the Fed’s actions are working, the economy is slowing, and that inflation will come down sooner rather than later. A slowing economy is a sign that the interest rate hikes from the last few months have already begun to slow the economy and cool inflation. Therefore, the market may rally on bad economic news in the coming weeks.
Conversely, Friday’s strong jobs report means that inflation is likely to linger, which means that the Federal Reserve may need to take interest rates still higher before getting inflation under control. In short, more jobs mean more inflation which means more Fed interest rate hikes.
We are likely to see more of the volatility from this week, while the market looks for clear signals that inflation is under control and the end point of the Federal Reserve rate hikes is clear.