Bad news for the economy is once again bad news for the stock market as recession uncertainty dents consumer spending

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  • Bad news for the economy is once again bad news for the stock market as fears of a recession grow.
  • Bad economic news was cheered last year as it signaled inflation may be cooling and the Fed may ease up on rate hikes. 
  • “The equity markets have apparently begun to interpret data with a more realistic perspective,” LPL said.

Bad news for the economy is once again viewed as bad news for the stock market as fears of a recession grow and consumers pull back on spending.

Last year, most negative economic data was treated by the stock market as bullish, as it signaled to investors that their main concern of inflation was likely to ease, allowing the Federal Reserve to slowdown or pause its interest rate hikes.

But now that inflation has clearly made progress on abating, and the Fed has stepped down from its outsized 75-basis point rate hikes, bad economic data has less of a positive impact on stock prices.

“What just some weeks ago would have seen markets cheering the weaker data as it would have suggested correctly that the Fed’s aggressive rate hike campaign is doing its job in tamping down the demand side of the economy, is now being judged more harshly with bad news no longer enjoying a warm welcome by traders and investors alike,” LPL’s chief global strategist Quincy Krosby told Insider via e-mail.

Investors are turning their attention to the health of the broader economy as cracks start to form.

Retail sales fell 1% in December, and the revised November data also showed a 1% decline. It’s the first real sign that the consumer is growing more cautious as they hear over and over again that a recession is imminent. Business activity also slowed according to the Producer Price Index.

And investors aren’t happy. The S&P 500 has dropped more than 2% after the December retail sales data was released on Wednesday.

“Consumers will have less support from surplus savings this year, which increases the risk that 2023 will be a tough year for economic growth,” LPL’s chief economist Jeffrey Roach said in a Wednesday note.

None of this is a surprise to the bond market, as various inverted yield curve indicators are telling investors that a recession may indeed be at hand.  

“The equity markets, always more cheerful than their fixed income brethren, have apparently begun to interpret data with a more realistic perspective,” Krosby said.

The last domino to fall is the jobs market, which has held up relatively well despite high-profile layoffs from mega-cap tech giants like Amazon and Microsoft. Jobless claims fell unexpectedly last week to 190,000, well below estimates of 250,000.