Bad news is bad news… until it’s not.
As investors, we’re in an industry that constantly twists meanings to meet narratives. Every expert is looking for a way to make the latest news or data fit his or her investment angle.
It’s confusing. But at some point, bad news can become good news.
That’s the case today with one indicator that typically signals bad news for Americans…
In normal times, it’s not a good thing for the U.S. economy when this indicator is up.
But as I think most of us can agree… today isn’t normal.
Now, this “bad news” indicator is good news – at least in the short term. As you’ll see today, it’s rising off its most recent low. And many investors are rejoicing in this development…
If you haven’t guessed by now, I’m talking about the unemployment rate.
Folks normally view rising unemployment as a bad thing. When they hear unemployment is up, they worry about the economy’s future. And in many cases, stocks sell off on the news.
That’s how it works in “normal” times, at least. But as I said earlier, it’s different today…
Inflation is still high. And the Federal Reserve has hiked interest rates to historically high levels to combat it. That has turned everything on its head in the U.S. economy.
So for months, I’ve believed that when unemployment started to tick higher, the stock market would react to the upside. That’s because many investors see the same thing…
Lower rates are coming.
You see, the Fed always cuts the federal-funds rate when unemployment rises. That’s the benchmark interest rate in the U.S. – all other interest rates ebb and flow with it.
And so far this year, unemployment is up almost 15% off its low. Take a look…
Think about it this way…
Since rates were so low for so long, demand for “cheap money” skyrocketed. That eventually created inflation – which we’ve dealt with following the COVID-19 pandemic.
So to make money more expensive, the Fed increased rates. It did that to kill inflation.
Now, the opposite is true. Demand is slowing down.
That’s clear from many retailers’ earnings reports. For example, home-improvement giant Lowe’s (LOW) and retail titan Walmart (WMT) both pointed to this idea in recent weeks.
And importantly, as I just showed you… unemployment is rising at the same time.
That’s a recipe for a recession. You would think most folks would view that as bad news.
But not today…
Rather, this one-two punch of slowing demand and rising unemployment is pushing the stock market higher – and fast. The S&P 500 Index is up roughly 10% over the past month.
Put simply, the anticipation of the Fed’s eventual rate cut is a huge sentiment boost…
The market previously expected the first rate cut to happen next June. Now, it believes it could happen in April or May. The probability of a rate cut in the first half of 2024 is rising.
Stocks are rallying on that idea in the short term. And yet, as I said in September, the market won’t like the Fed’s rate cut once folks realize it means things are slowing down.
So let’s enjoy the rally while it lasts. But don’t get careless.
Bad news won’t be good news forever. Eventually, we’ll return to normal times.