With the U.S. second quarter corporate earnings reporting season mostly completed, stock investors are now shifting their focus to the latest economic data. Interestingly, they have been responding positively to what is typically considered “bad economic news” or any information that suggests a potential economic slowdown.
According to Chris Fasciano, a portfolio manager at Commonwealth Financial Network, this trend has been noticeable for almost nine months now. Softening economic data and lower inflation could indicate that the Federal Reserve will soon halt its interest rate hikes.
Looking ahead, traders in Fed fund futures are currently pricing in a more than 90% chance that the central bank will maintain its policy interest rate at its September meeting. Additionally, there is around a 35% probability that the interest rates will be raised by 25 basis points in November.
U.S. Stocks Rise Ahead of Labor Day Weekend
U.S. stocks ended the week on a positive note in anticipation of the Labor Day holiday weekend. Friday’s released data revealed signs of a cooling labor market. Specifically, the U.S. added 187,000 new jobs in August, while the unemployment rate rose from 3.5% to 3.8%.
Although this data suggests a gradual slowdown in the labor market, Chief Investment Officer Richard Flax from Moneyfarm emphasizes that there are no indications of a significant weakening in the overall economy.
A “Rolling Recession”
Investment expert Jamie Cox from Harris Financial Group describes the current economic situation as a “rolling recession.” Cox points out that recessionary activity tends to move from one sector to another rather than resulting in a broad-based decline.
While the softening economic data has not been alarming, Cox adds that a noteworthy decline in the housing and labor markets could potentially change the current narrative.
Fed Rate Hikes Could Cease as U.S. Job Gains Reach Impressive Levels
To break the cycle where bad economic news is considered good news for stocks, the current economic data would have to be significantly worse than it currently stands, suggesting that increased interest rates could cause further damage, according to Flax.
Flax also notes that this trend may reverse if there is a significant downgrade in corporate earnings expectations. “I believe we need to see it when macro data translates into weakened profitability.”
Additionally, investors should be vigilant about the possibility of inflation accelerating once again, warns David Merrell, Managing Member and Founder of TBH Advisors.
According to recent data, the personal consumption expenditures price index experienced a modest 0.2% increase in July. However, yearly inflation inched higher from 3% to 3.3%, as reported by the government on Thursday.
“Inflation overall has been trending down nicely. But if it starts to kick back up, that could mean bad news turns into bad news once again,” explains Merrell.
If investors begin to view bad economic news as being detrimental to the stock market, it could exert pressure on this year’s stock market rally. Currently, the S&P 500 has seen a rise of 17.6%, while the Nasdaq Composite has witnessed a substantial increase of 34%.
During the past week, the Dow Jones Industrial Average climbed by 1.4%, the S&P 500 experienced a 2.5% advance, and the Nasdaq gained an impressive 3.2%, as reported by Dow Jones Market Data. Furthermore, the S&P 500 recorded its largest weekly increase since the week ending June 16.
Looking ahead, investors can anticipate data on the July U.S. international trade deficit and the ISM services sector activity for August, both of which will be available on Tuesday. Additionally, they should pay attention to weekly initial jobless benefit claims data on Thursday and July wholesale inventories data on Friday. Finally, investors will also be tuned into speeches from a number of Fed speakers, as they seek clues regarding the central bank’s stance on future rate hikes.