Bad News is Good News?

December 7, 2023

I’ve been writing to you on a weekly basis for a year and a half now. At times, I certainly appreciate the fact that I am likely repeating myself, sharing a topic with you that we have covered in the past. This is one of those weeks – but arguably, this is one of the most important things to understand as an investor so it’s worth discussing yet again

There is a tricky dynamic that can present itself in markets on occasion. At certain stages in the market cycle, good news in the economy/society is taken positively by markets (ie: good news is good news) and bad news/events are taken in a similar manner by markets. And at other stages, the news an the reaction don’t line up (bad news = good markets and vice versa). I know – confusing!

(I wrote more about it in March and shared a 2×2 quadrant to help illustrate)

With the release of a few jobs reports this week, it appears we are once again in the bad news is good news square of the quadrant.

There were two jobs reports released (so far) this week. Please note that the Bureau of Labor Statistics (BLS) jobs report was not released for November 2023 at the time of this post – but that will be another key data point.

The first was the JOLTS report – a report on the job openings in the economy. Job openings were reported at 8.73 million, a 6.6% decline month over month and below the expected 9.4 million estimate. This is the lowest level in job openings since March 2021. The ratio of workers to openings now sits at 1.3 to 1 – far off its highs of 2 to 1 during the immediate post pandemic world and almost in line with pre-pandemic levels of 1.2 to 1.

The next was the ADP payroll report, which is often viewed as a predictor of the BLS report. The ADP report for November showed new jobs of 103,000 (versus 130,000 expected). More importantly, a meaningful amount of the softness was in the travel & leisure segment – an area that has been red-hot as spending surged in these areas post pandemic. Weakness in this area is being viewed as a sign that the economy as a whole will moderate hiring and wage growth in 2024.

Both of these reports were weak/”bad” as they show a weakening job market. Why would markets view this as good news? It all comes back to interest rates.

Fed officials have been laser focused on the red-hot jobs market as a specific area of concern in their battle to combat inflation. (If the labor market is strong, wages are strong, giving people more money to spend). Seeing a decline in job openings and slowing private payrolls will likely be welcome news to policymakers and encourage them to leave interest rates as-is (or even lower them in relatively near future). And broadly speaking, falling interest rates raise the price of stocks as well as bonds, leading to a rise and stability in markets in the face of a weakening labor market.

While this fact pattern is specific to present day, the pattern of “bad news is good news” repeats itself on a regular basis. It requires investors to look at the likely follow-on policy actions, interest rate reactions, and money flows in response to economic data and world events. Certainly not easy – but nothing worthwhile ever is.

Onward we go,

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