The stock market really doesn’t want too much good news, even though it might not be acting like it right now.
Headlines have been screaming positives, and Wall Street has delivered.
On Thursday, word came that the core inflation rate—the one that the Federal Reserve prefers—is falling. A day earlier, the government revised third-quarter real gross domestic product growth to 5.2% from 4.9%.
Yes, inflation is coming down and the economy is growing—not slowing. Talk of a recession hasn’t gone away, but it certainly is a lot less heated.
November, a historically strong month anyway, is off the charts. The three major indexes are doing more than just flexing their fall muscles. They’re all having its best November in three years.
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The
S&P 500
is up 8.9% in the past 30 days, on pace for its best November since it added 10.6% in 2020. The
Dow Jones Industrial Average
has gained 7.5%, also its best November since, 2020—11.8%. And the
Nasdaq Composit
e just keeps climbing, up 11.3%—its best November, too, since 2020, when it rose 11.8%, according to Dow Jones Market Data.
The gains since January are more than impressive. The S&P 500, for example, is up 18.9%, and the Nasdaq has added 36.6%. (Don’t blink. That figure is right.)
So, the combination of the usual late-year buying and the solid economic numbers have sprinkled stardust on shareholders. Growing GDP should translate into higher corporate profits, which have been beating estimates.
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So, in that sense, dynamics that are supporting the market’s gain in the past few weeks. But don’t buy into the Wall-Street-loves-everything-rosy plot.
It doesn’t.
The hard truth is that the market doesn’t want too much good economic news right now.
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For example, much of this year’s rally has come as the inflation rate has dropped to almost 3% from a peak of just over 9% last year, demonstrating the market wants healthy cooling of demand.
That cooling, in turn, allows the Fed to hold interest rates steady, a move intended to tamp down demand and prices. The central bank might even cut rates in a few months.
In fact, as the S&P 500 clawed itself out of a multimonth low in late October, the federal-funds futures market had priced in a 46% probability of a rate cut in March, up from about 11% at the start of the rally.
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That’s because, with the exception of the new GDP reading, there have been plenty of lower-than-expected economic numbers. The Citi U.S. Economic Surprise Index dropped to almost 25 in mid-November from just under 75 a few weeks ago, according to 22V Research.
The market has rejoiced at the plunge, which showed many areas of the economy slowing down. This has come alongside more cooling of inflation—the Fed’s annual target is 2%. The central bank is almost certainly going to sit on any more rate hikes.
Going forward, though, stocks will still manage to gain on bad news. Any evidence of an economy that’s too strong would lower the likelihood of rate cuts, or raise the possibility of another rate increase, ultimately making it more difficult for consumers and businesses to spend money. Less spending would eventually hurt earnings estimates, which would send stocks lower even before those developments unfold.
“In 2024, good news likely will be viewed as bad news supporting higher [rates] for longer (and vice-versa),” wrote Chris Harvey,
Wells Fargo
’s
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chief U.S. equity strategist.
Yes, it’s complicated. Right now, the S&P 500 just can’t tolerate rates going any higher.
Maybe the only way to make all the pieces easier to understand is to remember this: It’s still a bad-news-is-good-news market.
Write to Jacob Sonenshine at jacob.sonenshine@barrons.com
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