It’s all about context. Sometimes investors look at the headlines and decide that good economic news is good market news too. That makes intuitive sense. More growth equals rising earnings equals higher share prices. Other times, though, what the market craves is some apparent doom and gloom. This is harder to grasp for newcomers to the market. Bad news can, counter-intuitively, be good if you’re an investor. And that’s where we’re at today.
What matters is not what’s happening in the economy today but what investors think it might mean tomorrow and how they’ve already positioned themselves ahead of the news. Are they glass half empty or glass half full? And do the headlines change the prevailing narrative?
Take what’s going on in the US market this week. Roll back to last Friday and investors were paying close attention to Jerome Powell, chairman of the Federal Reserve, speaking at the annual Jackson Hole economic symposium. They didn’t particularly like what they heard because he confirmed what we all suspected - that he is fully focused on squeezing inflation out of the system, whatever it takes. If that means interest rates have to go a bit higher in November, then so be it.
But he also made it clear that he has an eye on the data and that he knows that he has already raised rates by more than five percentage points in just 18 months. The lagged impact of those hikes is yet to show through in the real economy, and he recognises the real risk that the Fed overdoes it and causes an avoidable recession.
So, when the first of this week’s important US data releases showed materially fewer job vacancies than last month, and far fewer than most economists expected, investors drew the reasonable conclusion that Mr Powell and his colleagues on the open markets committee of the Fed would now be a lot less inclined to give the economy one final squeeze in the autumn.
That’s part of the glass half full narrative, a story that is expected to get a further boost tomorrow when, hopefully, non-farm payroll data will show an economy that’s still creating jobs but at a slower pace than it has been during the post-pandemic recovery. That slowdown means less of a mismatch between supply and demand in the economy. And so less inflation. And so less need for restrictive monetary policy. On the face of it, more bad economic news is translating into good news for the market.
The other element in the glass half full story is that investors have convinced themselves that the bad news is only a little bit bad. Goldilocks has stumbled on a bowl of porridge that’s not too hot but it’s certainly not too cold either. This week, that optimistic take showed up in a Conference Board survey that revealed fewer respondents expecting a recession in the US than at any point so far this year. The fabled soft landing - beating inflation without simultaneously breaking the economy - is within reach.
So maybe this week will be the moment when investors stop fretting that the Fed has slammed the brakes on too hard and start pricing in a gradual cooling from too hot to just about right. From a post-Covid inflationary spike to a new normal of steady growth, a healthy jobs market and interest rates that put a sensible price on borrowing money while at the same time rewarding savers with an acceptable return on their cash.
That’s certainly what three consecutive daily rises in the S&P 500, including the best day in the market for three months on Tuesday, are telling us. It’s what falling bond yields, and so rising bond prices, are also indicating. Only time will tell if this is wishful thinking. For now, though, we’ll take it.
So, that’s what’s happening at the intersection of the world’s biggest economy and stock market. Now, what’s going on in the second largest. China’s market cup has been categorically half empty for the past six months as investors have viewed a string of bad headlines in the property sector, on consumer spending, exports and deflation, and drawn the opposite conclusion to the one that US investors have arrived at. The half-empty narrative in China has painted a picture of policymakers who are studiously avoiding the stimulus the market is crying out for. Bad news for the Chinese economy has so far been bad news for investors too.
But this week, things have shifted in China too. Country Garden, the country’s biggest property developer, may be on the brink of default, house prices may be falling, the Chinese consumer may be on strike, but little by little the authorities are trying to make life a bit easier. They may not want to re-inflate the property bubble, but they are making it easier for banks to lend and for investors to buy shares. Just as it is in America, bad news is starting to look surprisingly like good news for the market. On Monday, for a brief delirious moment, shares in Shanghai and Shenzhen were up more than 5pc on the day.
The clear takeaway from this week’s movements in both the US and China is that the economy and the stock market are not the same thing. They march to a different beat. The economy moves in real time, the markets always seek to anticipate. The challenge for investors is knowing what the trigger will be for the half empty glass to suddenly start to look half full. But if you wait for the headlines to give you a signal, you will invariably be too late.
Tom Stevenson is an investment director at Fidelity International. The views are his own.
