The stock market ‘speaks’: Investors are unconcerned about a recession


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Loud and clear: Investors expect rate cuts, not a recession.

CHAPEL HILL, N.C. (MarketWatch) — A recession is imminent? That’s just fake news.

That certainly appears to be the judgment of the U.S. stock market in the wake of Friday’s much-weaker-than-expected May jobs report. Far from plummeting, as one might imagine the stock market would do in the wake of that news, it rallied — with the Dow Industrials

DJIA, +0.68%

 tacking on 263 points and the S&P 500

SPX, +0.90%

 rising more than 1%.

Counterintuitive, to be sure. But not particularly unusual.

In fact, according to a ground-breaking academic study a number of years ago, the market’s behavior Friday is precisely what you would expect when it’s not concerned about a recession but instead about interest rates.

The study, “The Stock Market’s Reaction to Unemployment News: Why Bad News Is Usually Good for Stocks,” was published in the Journal of Finance in 2005. Its authors are John Boyd, a finance professor at the University of Minnesota; Jian Hu of Moody’s Investors Service; and Ravi Jagannathan, a finance professor at Northwestern University.

The researchers found that when investors’ primary concern is a recession, then unexpectedly bad unemployment news causes the stock market to fall. But, during economic expansions, unexpectedly bad news is a good thing because it increases the likelihood that the Federal Reserve will reduce interest rates, or at least not raise them.

This helps us understand the market’s behavior Friday. By the end of the day, the odds of a rate cut by the end of July had jumped to 87%, according to the CME’s FedWatch Tool. Only 12 trading sessions before Friday, in contrast, those odds were 15%.

Jagannathan, in an interview, confirmed that, in his opinion, Friday’s market action indicates that “recession is not the market’s primary concern.” He added that it “also indicates the market’s belief that the trade war will be resolved amicably.”

To be sure, it’s always possible that the market could be getting it wrong. For example, as Jagannathan noted: “If the trade war spins out of control, all bets are off.” But, more often than not in the past, the market got it right in its interpretation of the unemployment data.

The broader lesson here is the importance of focusing on actions, not words. Commentators are forced to impute motives to investors to “explain” why the market does what it does, but their explanations are little more than after-the-fact rationales — reminiscent of Rudyard Kipling’s “just so” stories on topics like how the leopard got his spots.

Talk is cheap, in other words. But when investors “speak” collectively by placing bets with their hard-earned dollars, it pays to listen.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at

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