So far, the bad economic news has been mostly positive for stocks as investors worry about whether the Federal Reserve will start cutting interest rates. However, there is also a danger in going too far, as too much bad news could herald a sharp downturn or even recession in the future. That’s the dilemma the market finds itself facing as it approaches a week of key data focused on the all-important U.S. labor market, which in turn provides signals about consumer health. Ohsung Kwon, equity and quantitative strategist at Bank of America, said in a client note: “Bad news has been good news for stocks over the past two months… but if economic growth deteriorates too much, bad news could turn into bad news.” Kwon noted , the S&P 500 and the U.S. dollar have diverged almost perfectly over this period. The U.S. dollar index has been steady but gradually declining, while the large-cap index has also been steady but gradually rising, a trend that has become particularly severe over the past month. , the S&P 500 rose about 3%. The dollar often rises on bad news, while stocks rise on good news. .SPX .DXY Line 2024-04-01 Stocks Vs. Meanwhile, economic data generally deteriorated, or at least fell short of Wall Street’s forecasts. The Citi Economic Surprise Index, which measures actual data versus consensus expectations, began to decline in mid-April and turned negative in late May, a counter-cyclical measure. Showing that expectations exceed reality, in most cases, bad economic news may help convince the Fed that now is a good time to start cutting interest rates, with the only exception being rising inflation, which would push the Fed to tighten monetary policy. . Since July 2023, the central bank has kept its benchmark borrowing rate in a range of 5.25%-5.5%, the highest level in about 23 years. Concerns about the Fed taking a tougher stance on inflation have led to multiple rounds of stock market volatility. Volatility. That brings markets to a flurry of data for the week, which includes surveys on job openings and private job creation, ending on Friday with the Bureau of Labor Statistics’ non-farm payrolls report, which economists polled by Dow Jones expected. Employment will increase by 178,000, roughly the same as April’s 175,000 jobs, and the unemployment rate may remain at 3.9%. Bank of America experts said that if this estimate is roughly correct, then the number of jobs created will be in the “appropriate range”, that is, 125,000 to 175,000, neither too hot nor too cold However, the bank said any number below 125,000 could signal a reversal of the “bad news is good news” trend in which unemployment is rising. A measure known as “Sam’s Rule” may be triggered. The rule, devised by economist Claudia Sahm of New Century Advisors, states that an economy is in recession if the average unemployment rate over a three-month period is half a percentage point above the 12-month low early stage. As of May, the 12-month low will be 3.5%, meaning the unemployment rate must remain at a three-month average of 4% to meet the SAM threshold. Based on the previous two months, the unemployment rate would have to rise to 4.3% in May to achieve this goal. However, Bank of America believes this is unlikely to happen, predicting job growth of 200,000, higher than consensus expectations. “Strong growth should also be positive for stocks as long as inflation remains under control,” Kwon wrote. Still, Bank of America’s strategy team expects market volatility around the report and believes the market is underestimating the potential for market volatility. . The firm recommends an options strategy called a “straddle” as a way to take advantage of potential market volatility. The move involves buying put and call options on S&P 500 options that expire on the same day and have the same strike price. It is rewarded when the index rises or falls relative to the strike price by more than the premium paid. Bank of America said trading has been profitable in six of the past eight weeks.
