Trading “good news is bad news” has limits if your attention span is longer than a day
The stock market is the economy.
US stocks are taking their lumps after surprisingly solid job growth in December saw the unemployment rate dip and Treasury yields rise. In the wake of this print, economists at Bank of America are saying that they no longer expect any more rate cuts from the Federal Reserve.
The SPDR S&P 500 Trust is down as much as 1.7% as of 12:15 p.m.
This jarring disconnect — stocks going down on jobs going up — gives rise to such quips as “good news (for the economy) is bad news (for the stock market),” or reminders that “the stock market is not the economy.”
To the contrary: for everything but the short term, the stock market is the economy.
Any stock-market bull who isn’t a day trader is pretty much always rooting for US job growth. During the past 30 years, the direction of six-month change in the stock market has been the same as the job market nearly 80% of the time.
And every bear market in the S&P 500 over the past three decades has come when the US economy was in recession or suffering from generationally high inflation.
Need more evidence of the symbiosis between Corporate America and the American economy? Over the past 30 years, any time analysts cut the S&P 500’s 12-month forward-earnings estimate by 10%, the economy has been in recession.
The idea that the stock market is always and everywhere rooting for lower interest rates, even if it requires outright weakness in the US job market to get them, is not consistently borne out by the data, to say the least.
The stock-bond correlation — that is, whether those two assets tend to move in the same or different directions — is highly regime-dependent based on whether or not investors fret more about elevated inflation (which tends to foster a positive correlation) or growth being too low (which tends to fuel a negative correlation).
We’re seeing stocks sell off today amid concerns that a strong labor market might preempt any additional easing from the Federal Reserve; in August, we saw stocks crater amid worries that the Federal Reserve wouldn’t be able to cut rates fast enough to prevent job losses!
As we discussed in our top charts to watch for 2025, every 3% drop in the S&P 500 in 2H 2024 coincided with times when we thought the Fed would cut a lot in 2025, or barely at all. Based on today’s price action, we’ve just reentered “barely at all” territory.
