Mitch on the Markets

September 12th, 2022

Why Wall Street Sees Bad News in Good News

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The August payrolls report in the U.S. showed the economy adding new jobs at a solid clip, with 315,000 new positions added for the month. This strong showing in the labor market was an extension of several months of impressive job gains, with an average of 381,000 new jobs added in each of the last six months. Monthly wage growth eased a bit in August, with hourly earnings for private-sector workers rising 0.3% month-over-month, and 5.2% from a year earlier. But this modest wage growth was coming off an acceleration in Q2 when wages grew at 1.6% versus the 1.3% growth posted in Q1.

Businesses are hiring, workers are earning better wages, and the labor force participation rate – which measures the number of people in the workforce – is on the rise. Any economist would tell you this data is good news for the economy and is a sign that growth fundamentals are holding up in spite of inflationary forces. Wall Street would disagree.1

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The reason is that the Federal Reserve is paying close attention to trends in the labor market, particularly when it comes to wage growth, because of the belief that higher labor costs can make inflation ‘sticky.’ At worst, a tight labor market and rising wages can result in what is known as a wage-price spiral, a feedback loop of rising labor costs resulting in businesses raising prices for goods and services. Higher wages equal more inflation.

This setup has created an environment where good news in some parts of the economy is being viewed as bad news for investors and traders. The stronger the labor market and wage growth, for instance, the higher the likelihood that the Federal Reserve is going to raise the fed funds rate by 0.75 percentage points at their September meeting and perhaps again in November. In this vein, good news for the economy is bad news for Fed monetary policy decisions, which is also apparently bad news for markets.

But I don’t buy into this narrative. For one, it makes the assumption that the Federal Reserve’s policy decisions are the single force driving the equity markets, which I strongly disagree with. I do believe there is a point where rising interest rates can be very prohibitive to growth, but I do not think we are very close to those levels with fed funds at 2.25% – 2.5%. The 10- and 30-year U.S. Treasury bond yields are also just above 3%, which historically remain at very low levels.

It is also true that rising rates have historically not resulted in falling stocks. In fact, the opposite has been true:

Fed Raising RatesChange in Fed Funds Rate over the periodS&P 500 Index Price Change over the period
July 1954 to October 19572.7%+33%
May 1958 to November 19593.4%+32%
July 1961 to November 19664.6%+21%
May 1967 to September 19695.2%+5%
March 1971 to September 19711.8%-2%
February 1972 to July 19749.6%-26%
January 1977 to July 198114.4%+28%
February 1983 to August 19843.0%+13%
March 1988 to March 19893.3%+14%
December 1993 to April 19953.1%+10%
January 1999 to June 20001.9%+14%
June 2004 to July 20064.2%+12%
November 2015 to January 20192.3%+30%

Source: Federal Reserve; Bloomberg3

Looking closely at the table above, readers will see that the Federal Reserve has carried out 13 monetary tightening campaigns, featuring several rate hikes in each. The S&P 500 went up in all but two of them, delivering a median gain of +14% (price return) while the Fed was actively raising rates. Rising rates do not necessarily mean falling stocks – in fact, they rarely do.

The two exceptions in the table above were 1971 during which the market declined by -2%, and 1972 to 1974 when the decline was much bigger. In those years, however, the U.S. economy was mired in recession due to the oil embargo, so the reason for the S&P 500’s decline arguably was because of more than just higher interest rates.

Nevertheless, there seems to be a pervasive feeling that strong economic data reports are bad for the stock market since they could influence the Federal Reserve to remain maximally hawkish. I encourage readers not to embrace this view – just let good news be good news.

Bottom Line for Investors

There is one area where just about everyone can agree that good news is good news – inflation readings. July’s personal consumption expenditures (PCE) price index, which is the Federal Reserve’s preferred measure of inflation, fell by -0.1% month-over-month and landed at +6.3% year-over-year, both marking a deceleration from June. Relief at the pump has been a big contributor to falling price pressures, which I think we should see continuing in August. That report is due out on September 13, along with other economic data. For investors, look for softer inflation figures and don’t fear strong economic readings – embrace them.

To help you focus on economic indicators and hard data, I am offering all readers our Just-Released October 2022 Stock Market Outlook4, which contains some of our key forecasts and factors to consider such as:

And much more…If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today! 

Disclosure

1 Wall Street Journal. September 2, 2022. https://www.wsj.com/articles/steady-labor-market-keeps-fed-on-track-for-another-rate-rise-11662130400

2 Zacks Investment Management reserves the right to amend the terms or rescind the free-Stock Market Outlook Report offer at any time and for any reason at its discretion.

3 The Washington Post. January 26, 2022. https://www.washingtonpost.com/business/stocks-dont-rise-or-fall-because-of-interest-rates/2022/01/25/25d23e7c-7dd7-11ec-8cc8-b696564ba796_story.html

4 Zacks Investment Management reserves the right to amend the terms or rescind the free-Stock Market Outlook Report offer at any time and for any reason at its discretion.

DISCLOSURE

Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.

Zacks Investment Management, Inc. is a wholly-owned subsidiary of Zacks Investment Research. Zacks Investment Management is an independent Registered Investment Advisory firm and acts as an investment manager for individuals and institutions. Zacks Investment Research is a provider of earnings data and other financial data to institutions and to individuals.

This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. Do not act or rely upon the information and advice given in this publication without seeking the services of competent and professional legal, tax, or accounting counsel. Publication and distribution of this article is not intended to create, and the information contained herein does not constitute, an attorney-client relationship. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole.

Any projections, targets, or estimates in this report are forward looking statements and are based on the firm’s research, analysis, and assumptions. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and other sources may be required to make informed investment decisions based on your individual investment objectives and suitability specifications. All expressions of opinions are subject to change without notice. Clients should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed in this presentation.

Certain economic and market information contained herein has been obtained from published sources prepared by other parties. Zacks Investment Management does not assume any responsibility for the accuracy or completeness of such information. Further, no third party has assumed responsibility for independently verifying the information contained herein and accordingly no such persons make any representations with respect to the accuracy, completeness or reasonableness of the information provided herein. Unless otherwise indicated, market analysis and conclusions are based upon opinions or assumptions that Zacks Investment Management considers to be reasonable. Any investment inherently involves a high degree of risk, beyond any specific risks discussed herein.

The S&P 500 Index is a well-known, unmanaged index of the prices of 500 large-company common stocks, mainly blue-chip stocks, selected by Standard & Poor’s. The S&P 500 Index assumes reinvestment of dividends but does not reflect advisory fees. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor. An investor cannot invest directly in an index.

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