’Good News Is Bad News’ Is The Worth News For Stocks

Authorized by Simon White, Bloomberg macro strategist,

We’re back in a “bad news is good news” registry for stocks, where weak economical data promotes higher prices. That’s typically a supportive backdrop for equity, but investors should be alert for erstwhile stocks neglect to rapidly on good news as this signals the economy is powerfully in or about to be in a recession, with the stock marketplace situated to see its worth returns.

“Bad news sells best. ‘Case good news is no news,’ Says Kirk Douglas’s writer in Billy Wilder’s Ace in the Hole. But bad news isn’t just a boon for newspapers; stocks besides freely rally on news that intuitively should see them selling off.

Blame central banks for this perverse state of affairs, with their implicit backstop for markets.

Stocks have late been ralling on the back of weaker economical data points, specified as payments and the ISM.

But the “bad news is good news” shorthand utilized by the marketplace needs a more demanding foundation.

• First, specify effectively that we mean by statements like “bad news is good news’;

• second, specify the different figures based on our definition;

• and third, look at how the marketplace has performed through the regiments.

Claude Shannon – the father of information explanation which forms the basis of modern communication – invented the thought that information is expected. The utility in information comes from what is expected, but what is unexpected. That’s typically how markets behave with economical data, reacting not to the information itself, but by how much it expects to the upside or downside.

Economic surprise indexes capture the number of forecasts on a cumulative basis. erstwhile they are positive, economical data is on net beating effects, and vice-versa erstwhile they are negative. so we can specify 4 regiments based on how stocks are changing in relation to economical conditions:

• Good news is good news

• Bad news is good news

• Good news is bad news

• Bad news is bad news

I have utilized the Bloomberg surprise indexes, which are separated out by economical type, specified as survey data and laboratory data. I took the median of these indexes, accepting thing that has a negative relation with the S&P over the full example period (we would anticipate a affirmative relation overall, e.g. affirmative beliefs causing the marketplace to rally).

The illustration above shows the S&P color-coded for the different regiments. As we can see, the marketplace not long ago wet back into a bad news is good news regime. Most of the S&P’s advance since October 2022 has either been in that register, or the good news is good news regime. These 2 are typically dominant erstwhile the marketplace is in a strong bullish trend – no wonder erstwhile stocks go up on good or bad news!

There’s no crucial difference if we restrict the example to the post-GFC period erstwhile national Reserve support for markets become more experienced, with the percent of the time erstwhile bad news was good for stocks only rising marginally to 26% from 23%.

The marketplace rallying on any news is what you would anticipate to see more often, given that the marketplace mostly raises over time. But if there were no Fed it's a strong bet that stocks would emergence little of the time overall as they would not be as inspired from bad news.

This is all rather interesting, but what does it tell us about stock performance? The table below shows the one, three, six and 12-month average forward returns of the S&P erstwhile in each register, along with the whole-sample average returns for the same time periods.

We can see erstwhile stocks are ralling on good or bad news (top 2 rows in table), forward returns on all time horizons are above average. Thus the current government is historically consistent with the S&P returning a small above its average over the coming months.

When stocks are selling off on bad news, that’s not large for forward returns, but erstwhile stocks can’t even rally erstwhile the news is good is erstwhile investors request to be most wary (bottom row in table).

It is in this registry that stocks consistently come in below average, performing partially over the next one, three, six and 12 months.

By what avenue does disappointing data case stock prices to rise? 1 way is bad data triggering a flight-to-safety bid in bonds, or a lending in Fed rate expectations, and the resulting lower years boosting stock prices. We find that this “bad news is good news” government is more likely erstwhile the stock-bond correlation is affirmative (on a rolling one-year base) versus erstwhile it is negative.

But that’s not the only way. Positioning can mean stocks can rapidly as investors sale the rum of weaker-than-expected data, and then buy the fact erstwhile the data comes in.

None, in the current environment there are more days erstwhile stocks and bonds are positively correlated versus erstwhile they are not, creating the likelihood the bad news is good news dynamic can individual for now.

That will aid stocks as they face powerful headswinds from an environment that may shortly begin to look more recessionary. Unsurprisingly, during recessions even good news is bad for stocks, and it’s best to be out of the marketplace again.