Heads I Win, Tails I Win

One of the hallmarks that separate bull markets from bear markets is how they respond to news. During a bull market, news tends to be interpreted with a positive spin. The opposite is the case in a bear market. This morning’s economic numbers show that bull market psychology is still in place, with lousy numbers leading to excitement in the stock market, nonetheless. During bull markets, investors like what they get – even if they didn’t get what they would have liked.

The monthly employment numbers were released this morning at 8:30 AM Eastern. These are typically among the most highly anticipated economic releases on the calendar because maximum sustainable employment is one of the two stated goals of the Federal Reserve.(The other is price stability as measured by indices like the PCE deflator and CPI). Few if any will dispute the Fed’s role in asset markets, so investors pay close attention to an economic release that directly reflects one of its key goals.

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The numbers released today, to put it plainly, stunk. The survey of economists expected an increase of 460,000 nonfarm payrolls. Instead, we got 245,000 – around half of what was anticipated. The unemployment rate remained steady at 6.7%, but that was largely attributed to a lower labor force participation rate instead of a healthier labor market. Markets are pricing in an improving economy, if not now, then in the post-COVID future. Today’s release was clearly not helpful to that narrative, right?

Of course not. Remember, markets are far more receptive to the idea of free money than anything else. Nothing else comes close. A weaker employment picture means that the Fed will by necessity remain accommodative. There is little that matters to stock markets more than an accommodative Fed. So bad news for the economy can be good news for the stock market.

And don’t forget, there is one thing indeed matters more to stock markets than monetary stimulus. That of course is fiscal stimulus. Markets have been salivating over the prospects for fiscal stimulus ever since this spring’s package helped launch asset prices. Equity investors were so enamored with the idea of fiscal stimulus that markets rallied on the prospects for a Democratic sweep in the recent election. (This is another example of markets learning to like what they got since they immediately warmed to the idea of a divided Congress).

Over recent days, stimulus hopes have been revived after being seemingly left for dead. Both parties appear to have coalesced around a bi-partisan proposal for about $908 billion. That is far below what had been hoped for just a few weeks ago, but something is better than nothing, right? And the weak economic numbers increase the urgency for that stimulus, don’t they?

That is where we stand this morning, with stocks, yields, and the US dollar all rising on a higher likelihood for a fiscal stimulus package that would boost the economy. Voila. Today’s bad economic news is actually good news for the economy. It’s been quite difficult for the two parties to agree on much of anything recently, meaning that we are far from assured of a successful outcome. But that outcome seems a bit more likely right now, and that is enough for a bullish market today.