Why bad news is bad news for the stock market

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Friday, January 6, 2023

Today’s newsletter is by Alexandra Semenova, markets reporter at Yahoo Finance. Follow Alexandra on Twitter @alexandraandnyc. Read this and more market news on the go with the Yahoo Finance App.

Investors have heard the adage a lot lately — good news is bad newsand vice versa.

In today’s economy, positive data on job growth, manufacturing, and consumer spending have been perceived as a sign the Federal Reserve will remain aggressive in raising interest rates to slow growth and inflation.

And higher rates are bad for investors.

See Thursday’s action for the latest example. After the ADP’s private payroll report showed employers added a robust 235,000 jobs last month and unemployment claims fell to a three-month low last week —seemingly good news about the economy — stocks sank.

On the flip side, potential signs the economy is softening could bring in optimism from some investors the Fed will be inclined to stop or slow its rate hiking campaign, a positive for risky assets like stocks.

In 2023, however, some investors do not see this dynamic enduring as the much-anticipated recession in the US draws near. Huw Roberts, director of research at QuantInsights, explained this environment well in an interview with Yahoo Finance Live earlier this week.

“The dynamic that we have witnessed before whereby bad economic news was almost seen as good news, in a sense that it stayed the Fed’s hand, and maybe brought in a lower terminal rate — that’s starting to shift,” Roberts said.

“And bad news just reflects a recession, reflects poor earnings, and is bad news for stock markets, and I suspect there’s a degree of that thinking going on.”

For many Wall Street strategists, Roberts’ outline tracks with their stock market forecast for 2023. Wall Street’s “consensus” idea for this year was stocks falling in the first half of the year as a recession starts, and rebounding in the second half as the Fed eases off rate hikes.

Goldman Sachs strategists see stocks lower in the first half of the year before finishing flat in 2023. (Source: Goldman Sachs)

But how close the economy actually is to this highly-anticipated recession seems perpetually pushed further out by incoming data.

The labor market has been persistently tight, with job openings still high and unemployment still low.

And Friday’s jobs report is forecast to be no exception — according to data from Bloomberg, economists expect 200,000 jobs were created last month with the unemployment rate set to hold at 3.7%.

Still, some cracks are starting to emerge. Less than one week into the new year, a flurry of companies including Amazon (AMZN), Salesforce (CRM), and Vimeo (VMEO) have announced fresh job cuts.

Although as Bank of America economist Michael Gapen pointed out, tech layoffs may not show up in the employment data for as long as laid off workers are receiving severance.

But as long as the economy appears strong, in Roberts’ view investor fears about how this recession does unfold are likely to grow.

“What we’re picking up on now, is more sensitivity to the real economy — greater sensitivity to growth, to inflation expectations, to industrial metals, and to the credit cycle — and what that tells us is markets will be spending the early part of 2023 really getting nervous about a hard landing,” Roberts said.

A hard landing in which bad news for the economy will be bad news for investors, even if the Fed tries to save the day.

Federal Reserve Board Chairman Jerome Powell speaks at a news conference after a Federal Open Market Committee meeting at the Federal Reserve Board Building in Washington, DC on December 14, 2022. - The Federal Reserve moderated its all-out campaign to cool US inflation Wednesday, lifting the benchmark lending rate by half a percentage point as its policy actions ripple through the economy.  (Photo by Nicholas Kamm/AFP) (Photo by NICHOLAS KAMM/AFP via Getty Images)

Federal Reserve Board Chairman Jerome Powell speaks at a news conference after a Federal Open Market Committee meeting at the Federal Reserve Board Building in Washington, DC on December 14, 2022. (Photo by Nicholas Kamm / AFP) (Photo by NICHOLAS KAMM/AFP via Getty Images)

What to Watch Today

Economy

  • 8:30 am ET: Change in Nonfarm PayrollsDecember (200,000 expected, 263,000 during prior month)

  • 8:30 am ET: Change in Private PayrollsDecember (183,000 expected, 221,000 during prior month)

  • 8:30 am ET: Change in Manufacturing PayrollsDecember (8,000 expected, 14,000 during prior month)

  • 8:30 am ET: Unemployment RateDecember (3.7% expected, 3.7% during prior month)

  • 8:30 am ET: Average Hourly Earningsmonth-over-month, December (0.4% expected, 0.6% during prior month)

  • 8:30 am ET: Average Hourly Earningsyear-over-year, December (5.0% expected, 5.1% prior month)

  • 8:30 am ET: Average Weekly Hours All EmployeesDecember (34.4 expected, 34.4 during prior month)

  • 8:30 am ET: Labor Force Participation RateDecember (62.2% expected, 62.1% during prior month)

  • 8:30 am ET: Underemployment RateDecember (6.7% during previous month)

  • 10:00 am ET: ISM Services IndexDecember (55.0 expected, 56.5 during prior month)

  • 10:00 am ET: Factory OrdersNovember (-1.0% expected, 1.0% during prior month)

  • 10:00 am ET: Factory Orders Excluding TransportationNovember (0.8% during previous month)

  • 10:00 am ET: Durable Goods OrdersNovember Final (-2.1% during previous month)

  • 10:00 am ET: Durable Excluding TransportationNovember Final (0.2% during previous month)

  • 10:00 am ET: Non-defense Capital Goods Orders Excluding AircraftNovember Final (0.2% during previous month)

  • 10:00 am ET: Non-defense Capital Goods Shipments Excluding AircraftNovember Final (-0.1% during previous month)

Earnings

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