Bad news is good news for stocks right now — but not for long, says this strategist
By Jamie Chisholm
Critical information for the U.S. trading day
Early Friday action in futures shows the S&P 500 SPX will hold at 11-week highs after rallying 12 of the last 14 sessions and taking its gains for November so far to 7.5%.
Investors like the sight of the 10-year Treasury yield BX:TMUBMUSD10Y sliding about 60 basis points in just four weeks, as traders increase bets that the Federal Reserve will be cutting interest rates by the middle of next year.
That's because recent data has pointed to easing inflation and slower economic growth. And, importantly, at the moment the stock market is happy that the latter is providing the former.
This is the bad-news-is-good-news narrative so beloved by equity bulls, where the prospects for lower borrowing costs seemingly trump all. But some commentators are warning that a psychological pivot is fast approaching.
"Much of this year has seen an inverse correlation where good or 'hot' data was negative for stocks, while bad data was positive. While lower yields are being greeted as a tailwind for now, that is often what happens ahead of recessions," says Jonathan Krinsky, technical analyst at BTIG.
Krinsky examined all recessions -- excluding the recent COVID downturn -- over the last 50 years, those in 1977, 1980-82, 1990, 2001 and 2007, and found that for all there was a period where rates were falling and stocks were rallying.
But, ultimately, as the reality of the recession set in, stocks began to fall. "Are we at the 'bad news is bad news' inflection point?," he asks.
Doug Kass, the president of Seabreeze Partners Management, thinks we should be. He notes that while the market has rediscovered its ebullience, as exemplified by the rush into call options, "the global bond markets and the commodities markets, especially oil, are signaling recession."
The price of U.S crude (CL.1) this week fell to its cheapest since July, while companies as diverse as Cisco Systems (CSCO) and Walmart (WMT) have in the past few days warned of challenging times ahead.
"Meanwhile, U.S. high frequency economic data is eroding -- including weakening jobs data, souring retail sales, the worsening NFIB data and a rising credit card delinquencies, among many other variables pointing in a southerly direction," says Kass.
These factors may not be such a problem if, as note above, stocks hadn't risen so quickly of late, traders weren't so bullish and the market wasn't so richly valued.
"A deep oversold in late October has turned into a deepening overbought in mid November as a universal view (which is really nothing more than a 'feel') is that 'seasonal strength' is upon us now," says Kass.
As traders have chased the upside, the equity put/call option ratio has fallen to its lowest level since July. Meanwhile, the equity risk premium -- the return investors can get when buying stocks relative to Treasurys -- is "down to levels not seen in several decades." says Kass.
"The last 'soft landing' in a period of rising interest rates was during the Clinton Administration...Buying into a recession at current and inflated valuations seems unwise," Kass concludes.
Markets
U.S. stock-index futures (YM00) (ES00) (NQ00) are a bit firmer as benchmark Treasury yields BX:TMUBMUSD10Y fall to two-month lows. The dollar DXY is softer, while oil prices (CL.1) recover a portion of Thursday's heavy losses and gold (GC00) nears $2,000 an ounce.
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The buzz
U.S. economic data due on Friday include October housing starts and building permits at 8:30 a.m. Eastern.
There's a lot Fedspeak. Central bank officials making comments include Boston Fed President Susan Collins at 9:45 a.m.; Chicago Fed President Austan Goolsbee at 9:45 a.m.; San Francisco Fed President Mary Daly at 10 a.m.; and Boston Fed President Susan Collins making a TV appearance at 10:15 a.m..
Options tied to $2.4 trillion in stocks, exchange-traded funds and equity indexes are set to expire on Friday.
Gap shares (GPS) are jumping 17% in Friday's premarket action after the clothing retailer reported third-quarter results that beat expectations.
ChargePoint (CHPT) shares are diving 24% after the EV charging company lost its chief executive and third-quarter sales were lower than forecast.
Shares of Applied Materials (AMAT) are down 7% after a report that the chip maker is under a criminal investigation by the Justice Department for potential export violations.
Traders were warily eyeing signs of a crack in the yen carry trade as the Japanese currency (USDJPY) rallied through 150 per dollar with no obvious fresh catalyst on the day.
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The chart
Wells Fargo sees the price of gold hitting between $2,100 and $2,200 an ounce by the end of 2024. The yellow metal has been stoic this year despite rising interest rates and a strong dollar, they note. "The demand side, especially, has started to heat up with central banks buying record amounts of gold."
Top tickers
Here were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern.
Ticker Security name TSLA Tesla NVDA Nvidia BABA Alibaba ADR AMC AMC Entertainment NIO NIO ADR AAPL Apple AMZN Amazon.com GME GameStop MSFT Microsoft PLTR Palantir Technologies
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-Jamie Chisholm
This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.
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11-17-23 0635ET
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