Why stocks are having a big reaction to a little positive jobs data

A stock market where most stocks are swinging together is usually a dangerous place to be. But there are be some silver linings – and this morning seems to be one of them.

The thinking behind the adage “in a crisis, correlations go to one” is that usually, the common factor causing all stocks to react the same way is a negative one.

Right now, at least part of the decline in stocks in recent weeks – though, I’ve argued, not the most important part – has to do with an increase in recession fears after soft jobs data.

(But, if stocks fall enough, that in and of itself will be considered a potential catalyst for an economic downturn, so at a certain point the “true meaning” behind a drawdown in the stock market becomes a distinction without a difference!)

However, in a higher-correlation environment, we can always change our minds on whether or not that Big Bad Risk is really so big and bad after all – and stocks can move higher together more aggressively than they normally would.

Case in point: the reaction to the weekly US initial jobless claims data this morning.

S&P 500 futures are having an outsized reaction to a Department of Labor report showing the number of Americans filing for unemployment benefits rose by slightly less than anticipated. In other words, this very modest sign of a lack of deterioration in the job market is causing traders to revise perceived recession odds lower.

Higher correlations taketh away, but…higher correlations also giveth sometimes, too.

It also probably matters that this is summer, a period when liquidity tends to be lower with people on vacations and it takes less money to move markets.