Broker Check

When Does Bad Economic News Become Bad For Markets?

June 11, 2024

When Does Bad Economic News Become Bad For Markets?

 

Markets were volatile last week thanks to conflicting economic data, as initially soft data increased rate cut expectations and that, combined with surging AI enthusiasm, pushed the S&P 500 to new all-time highs. But those gains were partially reversed later in the week as strong economic data (ISM Services and the jobs report) pushed back on rate cut expectations. 

For now, bad economic data remains good for stocks and bonds while good economic data is a negative for stocks and bonds, again because markets are trading off shifting rate cut expectations. But before Thursday’s solid ISM Services PMI,(ISM Services PMI, or Institute for Supply Purchasing Managers’ Index, is a monthly report that measures performance of non-manufacturing companies in the US) there was some chatter in markets that bad economic data might start to be bad for markets. 

That didn’t happen last week, but it begs an important question: When will bad economic data become a negative for stocks? The answer is: Bad economic data will become negative for stocks when the data is so bad that it sparks legitimate growth worries. To be clear, that didn’t happen last week (it may have happened if Thursday’s ISM Services PMI and jobs report were soft).

But it’s important to realize what while data is not at that point yet, it is moving in that direction and as a result, slowing growth remains the biggest risk to this market (and it’s not as insignificant a risk as the new highs in stocks imply). Reasonably, one might think, “If growth risks are building, why are stocks at new highs?” There are two reasons for this. First, AI. AI mania continues unabated, and the truth is that generic product updates from AIfocused companies (the next one is AAPL this week) still are effective at pushing the tech sector and the entire S&P 500 higher.

Second, rate cut expectations. The market is still primarily driven by Fed rate expectations and if rate cut expectations increase (as they did last week) that more than offsets any concerns about growth. Until those factors are eliminated (by AI hype finally getting overdone or data turning decidedly worse) stocks can rally despite the totality of economic data pointing towards a slowing of growth. But because our focus is beyond the short term, we continue to believe that maintaining long exposure while also actively trying to reduce volatility in portfolios remains appropriate. This week, the Fed and CPI will be in focus and lower yields will equal higher stocks. But again, amidst that potential enthusiasm, the outlook for growth is deteriorating and we will continue to point out that reality.

 

There is actually a third expectation that is not fully digested by the markets and that is the election. The closer we get, the more that indicator will contribute to the markets gains or potential losses. For now, I remain fully invested albeit with some value stocks to reduce the downside. 


"This material is provided for general information and is subject to change without notice.  Every effort has been made to compile this material from reliable sources however no warranty can be made as to its accuracy or completeness. The information does not represent, warrant or imply that services, strategies or methods of analysis offered can or will predict future results, identify market tops or bottoms or insulate investors from losses. Past performance is not a guarantee of future results.  Investors should always consult their financial advisor before acting on any information contained in this newsletter.  The information provided is for illustrative purposes only.  The opinions expressed are those of the author(s) and not necessarily those of Geneos Wealth Management, Inc."