Op-ed: When does good news become good again and bad news bad? It may take some time

Stocks and economic data have had an inverse relationship for the past couple of years. When economic numbers are positive, the market tends to perform poorly, and vice versa. Last month, manufacturing, services, and employment data all fell short of expectations, causing bond yields to drop and stocks to rally. This raises the question of when good news will be considered good again and bad news bad.

Inflation remains high, and there is speculation about when the Fed will change its policy. However, most policymakers are publicly committed to maintaining higher rates for an extended period. As a result, the market is likely to welcome slightly bad news, as it could prevent further rate hikes and lead to declines in bond yields. Defensive groups like utilities, consumer staples, and healthcare companies may fare well in such a scenario.

However, excessively low bond yields indicate potential challenges for the economy. It is challenging to differentiate between a healthy slowdown and the early stages of a recession. The upcoming job reports will be crucial in this regard. A more significant slowdown in job growth would likely reverse the current market sentiment, making deep cyclical stocks and small caps attractive investment options.

Small caps, however, come with higher volatility and risks. It may be safer to invest through exchange-traded funds (ETFs) like the iShares Russell 2000 ETF and iShares Russell Mid-Cap Value ETF. The current dynamic of bad news being good for the market is not unique and follows the cyclical nature of the markets.

A soft landing is possible if core inflation remains on track with the Fed’s target and job growth continues positively. However, these outcomes are uncertain. If job creation stalls, small caps and deep cyclicals may suffer losses but could lead the market during the subsequent recovery.