By Despite what it may seem like, the stock market has a unique aversion to good news. Yes, you read that correctly. Headlines may be filled with positivity, and Wall Street may be performing well, but behind the scenes, there’s a distinct unease.
Consider recent developments: the core inflation rate, the one preferred by the Federal Reserve, is showing signs of decline. Additionally, the government recently revised the third-quarter real gross domestic product (GDP) growth from 4.9% to an impressive 5.2%. All this suggests that the economy is not slowing down as some feared.
November is traditionally a robust month for the stock market; however, this year has been exceptional. The three major indexes are flexing their muscles and delivering their best performance in three years.
Let’s delve into the numbers. Over the past 30 days, the S&P 500 has soared by 8.9%, on track for its best November since 2020 when it recorded a growth of 10.6%. The Dow Jones Industrial Average has also experienced significant gains, rising by 7.5%—its best November since the same period in 2020 when it achieved an impressive growth of 11.8%. Even the Nasdaq Composite has joined the party, climbing by 11.3%, marking its best November since 2020 when it recorded a growth of 11.8%. These figures, supported by data from Dow Jones Market Data, speak for themselves.
But let’s not overlook the gains made since January. The S&P 500 has surged by an impressive 18.9%, while the Nasdaq has seen an astonishing increase of 36.6%. Yes, you read that correctly—don’t blink.
What does all this mean for shareholders? Well, aside from the usual late-year buying spree, the solid economic numbers are providing confidence and optimism. A growing GDP should correlate with higher corporate profits, and so far, businesses have been outperforming expectations.
However, it’s essential to understand that the market isn’t entirely enamored with good news. It thrives on a delicate balance of economic indicators. Take this year’s rally, for example, which coincided with a drop in the inflation rate from its peak of over 9% to nearly 3%. This demonstrates the market’s desire for a healthy cooling of demand.
So while it may seem like Wall Street loves everything rosy, the truth is more nuanced. Too much good economic news can throw off this delicate equilibrium. In the meantime, shareholders can bask in the glow of positive developments, but with a watchful eye on the market’s ever-changing preferences.
The Federal Reserve’s Strategy to Control Demand and Prices
The current cooling of the economy allows the Federal Reserve (Fed) to maintain stability by keeping interest rates steady. In fact, there is even a possibility of future rate cuts. As the S&P 500 rebounds from a recent low, the probability of a rate cut in March has risen to 46% from an initial 11% at the beginning of the rally.
This likelihood is due to lower-than-expected economic numbers, with the exception of the new GDP reading. According to 22V Research, the Citi U.S. Economic Surprise Index dropped to nearly 25 in mid-November from just under 75 a few weeks prior.
As various sectors of the economy display signs of slowing down, the market responds positively to these developments. Additionally, inflation is cooling, aligning with the Fed’s annual target of 2%. Consequently, the central bank is highly unlikely to implement any more rate hikes.
However, despite this positive outlook, stocks will continue to flourish even in times of bad news. If the economy appears too robust, it decreases the probability of rate cuts and potentially raises the chance of another rate increase. This scenario ultimately hampers consumer and business spending. Consequently, reduced spending would negatively impact earnings estimates and cause stocks to decline before these developments fully unfold.
Chris Harvey, Wells Fargo’s chief U.S. equity strategist, predicts that by 2024, good news will be seen as bad news, leading to prolonged higher rates.
The current situation is complex, but one thing remains clear: the S&P 500 cannot handle any further increases in rates.
To simplify matters, it’s essential to remember that this is a market where bad news leads to positive outcomes.
Comments