It is becoming increasingly difficult to explain why the market moves the way it does in this bizarre environment. After a shocking September (the S&P 500 lot more than 9% and the Nasdaq Composite fared even worse), stocks rallied almost 6% in the first two days of October. That’s the best start to a quarter since 2009. But why?
It is as simple as that: bad news is good news and vice versa!
Stocks rallied last Monday on news that U.S. manufacturing activity in September decelerated to its slowest pace in almost 2.5 years. Generally,
this very bad news but the bad news sent the S&P 500 Index up by 2.5%! Then on Tuesday, the Labor Department reported that job openings fell by 1.1 million in August, the most since early in the COVID-19 pandemic. That is terrible news for workers and the economy but it was even better news for financial markets. Why? Because that’s what investors believe it’s exactly what the Federal Reserve wants to see, a rebalancing of job openings to more closely match the number of unemployed workers. As a result, the S&P 500 rallied another 3.1%.
In normal times, stocks rally on good economic news and drop on poor data. Strong manufacturing data means demand for goods is rising. An increase in job openings means companies are seeing healthy demand and are hiring to meet it.
These clearly aren’t normal times. It’s all about the Fed and interest rates these days. Markets will rally on any data that indicates the economy is slowing and could push the Fed to a less hawkish stance on monetary policy. Will the Fed raise its benchmark interest rate another 0.75% or just 0.50% when it meets beginning of November? This is the only question on Wall Street.
But adding to the confusion, the employment report for September came in stronger than expected and let the markets fall after the release of the data. The consensus was that U.S. companies added 250,000 new jobs last month but in fact, they created 263,000 pushing the estimated jobless rate from 3.7% to 3.5%.
This good news is pretty bad news!