Good News Isn't so Bad For Shares Anymore – Or is it?

After two years of waiting on every new nugget of economic data, experts say the phenomenon of "good news" that causes "bad news" for stocks is now significantly diminished. But will this last?

It's easy for investors to get confused by this back-and-forth dynamic. After all, shouldn’t good news for the economy be good news for stocks? Unfortunately, in the short term, it’s not that simple. It all has to do with how the market believes the Fed will act in response to data about the economy.

When economic data points to a slowing economy – fewer jobs added in a given month, a rising unemployment rate, or a dip in manufacturing activity – it can prompt the Fed to take a more accommodative policy stance, which can be seen as a positive for stocks.

"That’s going to be good for financial markets," says Jason Draho, head of asset allocation Americas at UBS Global Wealth Management.

The opposite can also be true: Investors often see "good" economic data as a harbinger of tighter monetary policy. That’s bad for companies’ bottom lines and for investors because higher interest rates can weigh on the prices of stocks, bonds, and other financial assets.

It's also worth remembering, Draho adds, that sometimes bad news is just bad for stocks – as in the case of data that points clearly to a recession.

And over the long run, a healthy growing economy is good news for the stock market. But in the short term, it’s helpful for investors to understand which way the pendulum is swinging.

Has Good News Always Been Bad for Stocks?

Mark Hackett, chief of investment research at Nationwide, traces the phenomenon’s origins back to the bailout of Long-Term Capital Management, a hedge fund whose 1998 collapse ushered in a new era of closeness between the Federal Reserve and capital markets.

That dynamic then was taken to an extreme in the aftermath of the 2008 financial crisis, when the Fed first unveiled so-called quantitative easing, which involved pumping money into the economy through purchases of bonds.

This aggressive tool was repeated in the wake of the coronavirus pandemic, where bad news on the economy became good news as it prompted easy monetary policy over the last two years as the central bank worked desperately to get a handle on runaway inflation by raising interest rates to cool off the economy.

For example: after data from the US Department of Labor showed solid hiring in September 2022, the Morningstar US Market Index dropped 2.9%. The message? The Fed's rate hikes thus far hadn’t been enough to cool the economy, and more hikes would be coming soon.

"We had very volatile, very reactive, very emotional markets last year," Hackett says. "This year, not so much."

Good News Isn’t So Bad

The connection is still there, he says, but the amplitude of the market’s reaction is far smaller. For example: data released this week on the services sector of the economy was better than analysts expected, and the Morningstar US Market Index ticked down just 0.7%.

"We’re not seeing the overreaction" to good news like a strong jobs report, strong inflation data, or even good corporate earnings result that we used to, Hackett says.

He points out that volatility in the market has fallen significantly compared with last year and attributes the change to a market that’s focused on fundamentals rather than trying to read the tea leaves of "Fedspeak."

On top of that, Hackett says investors this year are less uniformly pessimistic than they were a year or two ago, which leads to more-muted reactions in the markets.

"When everyone is on one side of a trade," he says, "it’s a lot easier for a minute piece of news to move the market."

Moderating economic activity is also a sign that the Fed is doing its job successfully (at least for now), analysts say, and that means fewer surprises.

UBS' Draho points out that jobs and inflation surprises to the upside or downside are smaller this year than they were last year. That’s also true of rate increases: investors endured four hikes of three fourths of a percentage point in 2022, but hikes this year have only been a third as large, at 0.25% each.

With less volatility, Draho says, "you can have a lot more confidence in what the Fed is going to do."

Will 2024 Bring Good News or Bad News?

The dynamics of investor sentiment shifted significantly this year, as investors scaled back expectations for a recession and ratcheted up the likelihood of a soft landing. In July, Draho says, markets had a rare Goldilocks moment as inflation moderated and labor market growth slowed to healthier levels. At that moment, good news was actually good news.

But now, strong economic data has market watchers wondering if good data is too good – in other words, is good data bad again? Markets expect at least one more hike from the Fed this year, and it’s very possible that a strong economy will force the Fed to keep rates higher for longer.

Still, investors also have plenty of unanswered questions about the health of the economy, especially when it comes to consumers. They'll be watching closely for signs that the resilience we’ve seen until now is fading away.

"Is the consumer really healthy," Draho asks, "or are they starting to crack?"

Questions like that aren't going away anytime soon, and neither is the "good news is bad news" phenomenon. "This is one of those things that’s always there," Hackett says, "particularly at inflection points."

For the Trading Week Ended Sept. 8

• The Morningstar US Market Index fell 1.4%;

• The best-performing sectors were energy, up 1%, and utilities, up 0.7%;

• The worst-performing sectors were industrials, down 3.2%, and basic materials, down 2.9%;

• Yields on 10-year U.S. Treasuries increased to 4.26% from 4.18%;

• West Texas Intermediate crude prices rose 2.29% to $87.51 per barrel;

• Of the 871 U.S.-listed companies covered by Morningstar, 223, or 26%, were up, and 646, or 74%, were down.

What Stocks Are Up?

Shares for Airbnb ABNB and Blackstone BX jumped after S&P Dow Jones Indices announced that the companies’ stocks will join the S&P 500 before September 18.

Airbnb, which posted strong second-quarter results and raised its third-quarter sales outlook, will take the spot of consumer goods manufacturer Newell Brands NWL in the prominent index. Blackstone, which became the first private equity firm to be valued at $1 trillion back in July, will succeed the holding company Lincoln National LNC.

Additionally, the index provider announced that Liberty Energy LBRT will join the S&P Small Cap 600 index, leading the power company’s stock to rise. Liberty Energy will succeed the medical-device manufacturer Zynex ZYXI before Sept. 18.

Guideware Software GWRE stock rose after the firm showed growth and profitability in its fiscal fourth-quarter results. The software provider generated a revenue of $270 million during the quarter, up 10% year over year, while subscription and support revenue alone came at $117.3 million, up 25% year over year.

"Management expressed confidence in the firm’s progress, and rightly so, as Guideware continues to win replacement deals against competitors for more modern installations," Morningstar senior equity analyst Dan Romanoff says.

"This is consistent with last quarter and is an emerging trend that could have a meaningful long-term impact if it persists."

What Stocks Are Down?

ChargePoint Holdings CHPT reduced its full-year revenue outlook amid lower-than-expected results for its fiscal second quarter, leading its stock to plummet. The company, which operates a network of charging stations for electric vehicles, reported revenue of $150 million, which is up 39% year over year.

But Morningstar equity analyst Brett Castelli notes this was "towards the low end of its guidance range, while gross margins declined 4 percentage points sequentially to 21% (even when excluding a $28 million inventory impairment)."

Shares for FMC FMC fell after short-seller Blue Orca Capital published a report alleging that the chemical manufacturing company concealed information.

The activist investment firm claims that FMC misled shareholders to believe that its insecticide products will not face generic competition for years because of patents, but the report asserts that the company's patents are expired. FMC released a statement saying the report "made misleading and factually inaccurate statements," adding it acknowledged "it is a biased opinion piece."

Although second-quarter results for Trip.com TCOM were better than expected, the travel company's stock declined as investors await a more attractive entry point. The firm's operating margin grew 26.5% during the quarter and is expected to expand with demand, but Morningstar senior equity analyst Kai Wang says its international business still lags.

"The number of outbound bookings on Trip.com remains weak at only 60% of prepandemic second-quarter 2019 levels, but was still greater than the industrywide rate of 37% this quarter," Kai writes.

"The company hopes the international business can recover by the fourth quarter."