No news is good news is a familiar saying, meaning that if you don’t hear new information about something, it is most likely because nothing bad happened. Of course, it is clear that good news is good, and bad news is bad, in whatever you are hoping for, or hoping to avoid. In the stock market however, there are times when bad news is good news, and such was the case last week.
The ADP National Employment Report showed that private sector employment increased by 27,000 jobs last month, below consensus estimates looking for a gain of around 170,000. In the government’s employment report, the Department of Labor reported last Friday that the U.S. economy added (only) 75,000 jobs last month – well below market expectations for gains of approximately 185,000 jobs. Further, jobs gains for the previous two months were revised lower. So, how did the stock market respond to this bad news?
The Dow Jones Industrial Average gained over 260 points Friday, and all three major indices posted their best week of the year. The Dow jumped 4.7%, the Standard & Poor’s Index 500 climbed 4.4% and the NASDAQ Composite finished the week 3.9% higher. The reason for the strong weekly performance is that the bad news on the jobs data increased the chances the Federal Reserve would lower interest rates in the upcoming months, and for the stock market that is good news.
Markets were already beginning to think the Fed would cut rates sooner rather than later due to muted inflation and economic waves caused by the trade tensions, and the underwhelming jobs numbers added more and stronger evidence that lower interest rates are justified. The market is now assigning over an 85% chance that the Fed will cut interest rates by July, according to the CME FedWatch Tool – and that made it a happy week for investors!
Southport Station Financial Management, LLC