- Bad news for the economy is bad news for the stock market again as fears of a recession mount.
- Bad economic news was cheered last year as it signaled inflation might be cooling and the Fed could ease rate hikes.
- “Equity markets seem to have started interpreting data with a more realistic perspective,” LPL said.
Bad news for the economy is again viewed as bad news for the stock market as fears of a recession mount and consumers cut back on spending.
Last year, most of the negative economic data was treated as bullish by stock markets, signaling investors that their key concern about inflation was likely to subside, allowing the Federal Reserve to slow or suspend rate hikes.
But now that inflation has clearly made progress on the tide and the Fed has backed out of its outrageous 75 basis point rate hike, bad economic data is having less of a positive impact on stock prices.
“What just a few weeks ago had markets cheering weaker data as they would have rightly suggested that the Fed’s aggressive rate-hiking campaign is doing its job by dampening the demand side of the economy is now being harsher with bad news, traders and investors alike are not more welcome,” Quincy Krosby, LPL’s chief global strategist, told Insider via email.
Investors are turning their attention to the general state of the economy as cracks are forming.
Retail sales fell 1% in December and the revised November data also showed a 1% decline. It’s the first real sign that consumers are becoming more cautious as they keep hearing that a recession is coming. Business activity also slowed according to the producer price index.
And investors are not happy. The S&P 500 fell more than 2% after December retail sales were released on Wednesday.
“Consumers will have less support from excess savings this year, increasing the risk that 2023 will be a difficult year for economic growth,” Jeffrey Roach, LPL’s chief economist, said in a note on Wednesday.
All of this comes as no surprise to the bond market, as various inverted yield curve indicators are telling investors that a recession may indeed be imminent.
“Equity markets, always happier than their fixed-income brethren, seem to have started interpreting data with a more realistic perspective,” Krosby said.
The final domino to fall is the jobs market, which has held up relatively well despite known layoffs from mega-cap tech giants like Amazon and Microsoft. The number of jobless claims fell unexpectedly to 190,000 last week, well below estimates of 250,000.