(CNN) — A seismic shift in investor outlook has occurred: bad news is no longer good news.
Over the past year, Wall Street has been hoping that good monthly economic data will encourage the Federal Reserve (Fed) to halt its aggressive pace of interest rate hikes to rein in inflation.
But at its March meeting, just days after a series of bank collapses raised concerns about the stability of the economy, the central bank signaled it plans to stop raising rates sometime this year. With the end of interest rate hikes in the offing, investors have stopped trying to guess the Fed’s next move and have focused on the health of the economy.
This means that whereas weaker economic data used to be a sign of good news – that the Federal Reserve may stop raising rates – now cooling economic data simply suggests that the economy is weakening. This makes investors fear that the slowdown in the economy could lead to a recession.
What happened last week? Markets reeled after a series of economic reports indicated that the red-hot job market is finally easing (more on that later), sending alarm bells to Wall Street.
As a result, investors dumped high-growth, large-cap stocks that had rallied recently in favor of defensive stocks in sectors such as healthcare and consumer staples.
Although technology stocks rallied somewhat at the end of the short trading week – markets were closed for the Good Friday celebration – the Nasdaq Composite Index fell 1.1%. The S&P 500 was down 0.1% and the Dow Jones Industrial Average gained 0.6%.
What does this mean for the markets? Now that Wall Street is in “bad news is bad news and good news is good news” mode, it will look for signs that the economy is continuing to hold up.
What hasn’t changed is that investors continue to want to see refreshing inflation data. Although the central bank has signaled that it will stop raising rates this year, its actions so far have only stabilized prices somewhat. The personal consumption spending price index, the Federal Reserve’s preferred inflation gauge, rose 5% in the 12 months ending in February, well above its 2% inflation target.
Also, Wall Street could be overly optimistic about how the Federal Reserve will act in the future: some investors expect the central bank to cut rates several times this year, despite the fact that the central bank indicated last month that it has no intention of lowering it. rates in 2023.
It’s unclear how markets will react if the Fed doesn’t cut rates this year. But there probably won’t be a notable rally unless the central bank pivots or at least indicates it plans to do so soon, said George Cipolloni, a portfolio manager at Penn Mutual Asset Management.
Aggressive comments or comments that reveal inflationary concerns could hurt markets, he adds. “It keeps that boiling point and that temperature a little bit high.”
What’s next? The Fed will hold its next meeting in early May. Before that, you’ll need to analyze various economic reports to get an idea of how the economy is doing and how much you can take. Markets currently expect the Fed to raise interest rates by a quarter point, according to the CME’s FedWatch Tool.
Is the job market cooling off?
It seems that the labor market is cooling off a bit, at least according to the series of data released last week. But it is still too early to assume that the labor market has lost steam.
President Joe Biden declared Friday that the March data is “a good job report for hard-working Americans.”
The March jobs report revealed that US employers added 236,000 jobs last month, fewer than expected. Economists expected a net gain of 239,000 jobs for the month, according to Refinitiv.
The unemployment rate dipped to 3.5%, according to the Bureau of Labor Statistics. This figure is below expectations that it would remain at 3.6%.
The employment report was also the first in 12 months to come in below expectations.
But that doesn’t mean the job market isn’t strong anymore.
“The labor market is showing signs of cooling, but remains very tight,” Bank of America researchers wrote in a note Friday.
However, other data released last week help to show that the labor market is beginning to crack. The February Job Openings and Job Turnover Survey revealed last week that the number of available jobs in the United States fell to its lowest level since May 2021. ADP’s private sector payrolls report was well below of expectations.
What this means for the Fed is that the cooling off in the latest jobs report probably won’t be enough for the central bank to pause rates at its next meeting.
“The Fed will more than likely raise rates in May as the labor market continues to defy the cumulative effects of rate hikes that began more than a year ago,” said Quincy Krosby, chief global strategist at LPL Financial.