Breaking News
Investing Pro 0
Cyber Monday Extended SALE: Up to 60% OFF InvestingPro+ CLAIM OFFER

Markets Celebrate Weak U.S. Economic Data, But Is Bad News Really Good News?

www.investing.com/analysis/markets-celebrate-weak-us-economic-data-but-is-bad-news-really-good-news-200630688
Markets Celebrate Weak U.S. Economic Data, But Is Bad News Really Good News?
By Francesco Casarella/Investing.com   |  Oct 05, 2022 11:02AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
 
US500
-0.12%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
  • Markets are off to an excellent start to October on the back of weaker-than-expected U.S. economic data
  • Investors believe that a slowdown in industrial activity may help reduce inflationary pressures
  • However, weaker industrial data, along with a strong dollar, also indicate slower earnings ahead for U.S. companies

The stock market had a strong and sudden rebound in the first two days of October, with the S&P 500 index jumping about 5.75% in the first two sessions of the month. At the time of writing, the benchmark index is giving back some of those gains but is still trading comfortably above its mid-June lows.

S&P 500 1-Hour Chart
S&P 500 1-Hour Chart
But before we pop the champagne assuming the beginning of a trend reversal, we must analyze the reasons for the rally.
PMI Breakdown
PMI Breakdown

Source: Yardeni.com

One point concerns the charts above. When they say “bad news is good news,” it is as accurate as ever. Yep, the markets practically celebrated a drop in the U.S. manufacturing PMI to the lowest since 2020 (COVID period) and the most significant reduction in U.S. Job openings in nearly 2-1/2 years.

That is particularly important given the current market mindset that if the economy is weaker, inflation must also be subsiding, implying a less-aggressive Fed—and a prolonged market rebound.

Now, Monday also happened to be the first day of the stock market in October, so I found this interesting statistic on the internet: when the market performed above 2% on the first day of the month, how did the markets then do? You see the answer from the next day to six months ahead in the image below.

S&P 500 Performance When Gaining 2%+ On The First Day Of The Month
S&P 500 Performance When Gaining 2%+ On The First Day Of The Month

Source: Rennie Yang

Of course, not that we want to cling to this kind of statistic as a certainty. I’ve said a thousand times how I believe one should operate as an investor. Nonetheless, it is at least interesting to see the returns three and six months apart.

Now, after nine months of a bear market and a -21% performance, the real question we must ask ourselves is: what do the markets still have to price in to the downside?

I believe a few things are still missing, the main one being the incoming corporate earnings season. All major U.S. companies will release their quarterly earnings between October and November.

In theory, slower industrial activity combined with a strong dollar (more than half of Big Tech’s revenue comes from outside the U.S.) implies a considerable decline in earnings for just about every sector of the S&P 500.

S&P 500 Q3 Bottom-Up EPS Estimate
S&P 500 Q3 Bottom-Up EPS Estimate

Source: Factset

This combination of factors may lead to two scenarios:

  1. Conclude the cycle of negative data and news to be discounted, and thus take markets to a new and perhaps definitive bottom. In such a case, my opinion is that investors should take the opportunity to reduce cash holding by progressively buying high-quality assets.
  2. The markets could see weakness in U.S. companies as further evidence supporting the decline in inflation and thus paradoxically perceived, once again, as “good news.” In such a case, all the better for savvy investors that have been preparing for a reversal throughout this year’s bear market.

As I have shown in my most recent analysis, every single bear market in history was followed by an even stronger bull market afterward.

Will this time be different? No one knows, but the odds are certainly on our side.

Disclosure: The author is long on the S&P 500 and will buy more positions should the index continue to drop.

Markets Celebrate Weak U.S. Economic Data, But Is Bad News Really Good News?
 

Related Articles

Markets Celebrate Weak U.S. Economic Data, But Is Bad News Really Good News?

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Comments (5)
Mike Sim
Mike Sim Oct 05, 2022 10:55PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
If you are too blind too see that the biggest bubble in history(fact by so many measurables) is in the slow popping process- you cant be helped. Its over. The only question is when/will you sell? Nothing is “safe.”
Bipin Kochar
Bipin Kochar Oct 05, 2022 3:32PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
The Fed rate action has definitely resulted in a sharp drop in growth across the world and has already pushed countries with fragile economies like Pakistan, Sri Lanka into a severe recession.
Son Yay
Son Yay Oct 05, 2022 1:05PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
So...one data point, manufacturing data is all the Fed will look at and immediately cut? Sure, OK. The same Fed that claimed inflation was temporary and then slow to raise is lmao gonna not be slow again to cut? Inflation is here to stay. The strong dollar could take many months to wreak havoc on other economies. We are a long ways away kids.
Alan Rice
Alan Rice Oct 05, 2022 12:58PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Yes. Good is bad, and bad is good. But mostly less is really good when it is a little worse.
animus advertere
animus advertere Oct 05, 2022 12:05PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
For people who are exceptionally well paid, market analysts are exceptionally unintelligent. How many times in a row will they expect a fed pivot before they learn their lesson?
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
or
Sign up with Email