Is Good News Good For Stocks Or Bad?

Is Good News Good For Stocks or Bad? image

The State of the Market

From my seat, the question of the day is if good economic data is good for the stock market, or bad? Cutting to the chase, the answer appears to be, well, it depends on the day.

When Good News Is Good

To review, there are times when good economic data is good for stock prices. For example, when the economy is in the grips of a recession, good economic data signal that conditions are improving, which is likely to lead to better earnings in the future. And since the stock market is... everybody now... a discounting mechanism for future expectations, good economic data means that traders can look ahead to better days - via higher stock prices.

In reality, stocks tend to "sniff out" a turn in the economy before - sometimes long before - the improvement actually shows up in the data. This is why stocks tend to bottom well before the economy officially exits a recession. During this type of environment, good economic data can also serve as confirmation that the rebound in stocks is justified. Which, of course, is a good thing.

When Good News Is Bad

There are also times when good economic news winds up being bad news for the stock market. This tends to occur when the Fed is in the process of juicing the economy. You see, when good economic data shows up while the Fed is in an ultra "easy" mode, traders start to fear that the punchbowl (I.E. All the financial goodness that accompanies easy money policy such as carry trades, etc.) might be pulled prematurely from the stock market party.

Another situation where good economic news can be bad for stocks is when traders are worried about inflation. To be sure, it has been quite some time since anyone has had to worry about inflation running "too hot." For the past decade or so, it has been just the opposite. As in, the problem was too little inflation, not too much. However, those of us that started playing Ms. Market's game in the 1980s remember that too much inflation can also be problematic for stock prices.

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The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning's opinions and viewpoints regarding the future of the markets should ...

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