This week, we thought we’d explore the reasons why the stock market reacts negatively to good news and positively to bad news.
We’re in a news cycle where economic announcements, earnings announcements, and Fed comments are coming fast and furious. Last week, we watched news of a hot labor market put a damper on stocks as traders feared Fed rate hikes in response. Fed Chair Powell seemed to confirm incremental rate increases in comments he made last Tuesday, but the market still ended the day on a positive note.
Now, once again, the next few days will see some major economic reports being released, all of which will affect the market, for better or worse.
Some sectors, like consumer staples and consumer discretionary stocks, will be more affected than others as we get a better idea of how the economy continues to be affected by inflation. These reports also help inform the FOMC when it meets to discuss interest rate hikes.
Look for…
- The Consumer Price Index (CPI) on Tuesday, which measures the average change over time in a “basket of goods,” which includes food, automobiles, and even rent. It can be a major indicator of how inflation is moving…
- The U.S. Census retail sales report Wednesday, which estimates monthly food and retail sales by querying certain businesses…
- And the Producer Price Index (PPI) on Thursday – it measures the perspective of corporate buyers on the price of goods and services.
In the anticipatory interim, expect to see plenty of volatility and speculation from analysts and in the media.
Today, we’ll cover why the news cycle is such an influence on the market – and whether or not it’s possible to buck the trend in your own portfolio…
The Good News, Bad Market Paradox
There are a few sources of information that can send the market into a tailspin – or trigger a bullish response…
- Government and other economic reports, like the ones we’re getting this week…
- Quarterly company earnings reports…
- Global events, like the effects of Russia’s attack on Ukraine…
- And plain old corporate or social media gossip.
Good news from the Fed is bad news because it means rates will go up… but bad news about the economy is also bad news because it means growth is slowing. It is surprising that the major averages have been so stable with such a bias.
Here’s a recent example of the paradox in action:
Friday’s labor report and last week’s statement by Jerome Powell are perfect examples of what we mean; the Bureau of Labor Statistics reported 517K new jobs added to the economy in January. The labor report was more than double the average projections by analysts.
Good news, right?
All else being equal, you might have assumed the stock market would have popped up on Friday. However, the S&P 500 ended the day down -1.03%. Investors are still fearful that a hot labor market will motivate the Fed to continue raising interest rates in the short term.
And today’s CPI report didn’t reveal any surprises.
The numbers aligned with expectations of a .5% increase month over month. However, although that matches what traders had been expecting, it is high and gives the Fed room to move rates higher.
In fact, Thomas Barkin, CEO of the Richmond Federal Reserve Bank, is already out today, talking about raising rates for a longer period. So, on one hand, meeting expectations is good, but it also means the Fed can keep increasing the cost of capital. Overall, that is likely to keep volatility high in the near term.
But there is hope on the horizon…
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Bias Is Shifting… Despite All Odds
Jerome Powell was interviewed by David Rubenstein about the state of the economy last Tuesday. Powell was clear that the Fed thinks it will take another year for inflation to get back to the Fed’s target, and rates may have to rise higher than previously thought.
The S&P 500 whipsawed back and forth over 50 points during that interview as investors reacted to a more-hawkish Powell. However, stocks still ended the day positive. This seems like a clear message that, while investors are still uncertain about the economy in 2023, their bias is shifting in a positive direction.
This graph shows 15-minute increments of the S&P 500 Index last Tuesday in the time leading up to, during, and after Chairman Powell’s comments. Take a look:
A Few Pointers for Your Portfolio
Before the news breaks, you can take action to safeguard your own investments. Many economic events and news articles will work in the favor of one asset class, while being tough on others. Hedge and diversify your investments, so that news about one sector doesn’t tank your investments.
Don’t panic. When you have confidence in your investments, you can avoid a kneejerk reaction to headlines by sticking with your assets.
And finally, as you see above, it’s easy to track these announcements so that you’re prepared for the fallout, if any. Earnings reports and major economic announcements are scheduled in advance.
Sometimes, you can’t anticipate events that affect the market and overall economy – like geopolitical conflicts, weather events, or even pandemics. Once again, strategic investments and planning ahead can hedge the chaos of unexpected events and their economic impact.
A strategic move includes keeping your money close to home… here’s one way to play the “deglobalization” trend.
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Sincerely,
John and Wade
