Bad news is good news for stocks right now — but not for long, says this strategist

That’s because recent data has pointed to easing inflation and slower economic growth. And, importantly, at the moment the stock market is happy that the latter is providing the former.

This is the bad-news-is-good-news narrative so beloved by equity bulls, where the prospects for lower borrowing costs seemingly trump all. But some commentators are warning that a psychological pivot is fast approaching.

“Much of this year has seen an inverse correlation where good or ‘hot’ data was negative for stocks, while bad data was positive. While lower yields are being greeted as a tailwind for now, that is often what happens ahead of recessions,” says Jonathan Krinsky, technical analyst at BTIG.

Krinsky examined all recessions — excluding the recent COVID downturn — over the last 50 years, those in 1977, 1980-82, 1990, 2001 and 2007, and found that for all there was a period where rates were falling and stocks were rallying.

But, ultimately, as the reality of the recession set in, stocks began to fall. “Are we at the ‘bad news is bad news’ inflection point?,” he asks.

Doug Kass, the president of Seabreeze Partners Management, thinks we should be. He notes that while the market has rediscovered its ebullience, as exemplified by the rush into call options, “the global bond markets and the commodities markets, especially oil, are signaling recession.”

The price of U.S crude
CL.1,
+3.35%
this week fell to its cheapest since July, while companies as diverse as Cisco Systems
CSCO,
-0.07%
and Walmart
WMT,
+0.34%
have in the past few days warned of challenging times ahead.

“Meanwhile, U.S. high frequency economic data is eroding – including weakening jobs data, souring retail sales, the worsening NFIB data and a rising credit card delinquencies, among many other variables pointing in a southerly direction,” says Kass.

These factors would not be such a problem if, as we note above, stocks hadn’t risen so quickly of late, traders weren’t so bullish and the market wasn’t so richly valued.

“A deep oversold in late October has turned into a deepening overbought in mid November as a universal view (which is really nothing more than a ‘feel’) is that ‘seasonal strength’ is upon us now,” says Kass.

As traders have chased the upside, the equity put/call option ratio has fallen to its lowest level since July. Meanwhile, the equity risk premium — the return investors can get when buying stocks relative to Treasurys — is “down to levels not seen in several decades.” says Kass.

“The last ‘soft landing’ in a period of rising interest rates was during the Clinton Administration…Buying into a recession at current and inflated valuations seems unwise,” Kass concludes.

Markets

U.S. stock-index futures
YM00,
+0.00%

ES00,
+0.06%

NQ00,
-0.05%
are a bit firmer as benchmark Treasury yields
BX:TMUBMUSD10Y
fall to two-month lows. The dollar
DXY
is softer, while oil prices
CL.1,
+3.35%
recover a portion of Thursday’s heavy losses and gold
GC00,
-0.27%
nears $2,000 an ounce.

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The buzz

U.S. economic data due on Friday include October housing starts and building permits at 8:30 a.m. Eastern.

There’s a lot Fedspeak. Central bank officials making comments include Boston Fed President Susan Collins at 9:45 a.m.; Chicago Fed President Austan Goolsbee at 9:45 a.m.; San Francisco Fed President Mary Daly at 10 a.m.; and Susan Collins making a TV appearance at 10:15 a.m.

Options tied to $2.4 trillion in stocks, exchange-traded funds and equity indexes are set to expire on Friday.

Gap shares
GPS,
+29.92%
are jumping 17% in Friday’s premarket action after the clothing retailer reported third-quarter results that beat expectations.

ChargePoint
CHPT,
-35.01%
shares are diving 24% after the EV charging company lost its chief executive and third-quarter sales were lower than forecast.

Shares of Applied Materials
AMAT,
-5.26%
are down 7% after a report that the chip maker is under a criminal investigation by the Justice Department for potential export violations.

Traders were warily eyeing signs of a crack in the yen carry trade as the Japanese currency
USDJPY,
-0.63%
rallied through 150 per dollar with no obvious fresh catalyst on the day.

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The chart

Wells Fargo sees the price of gold hitting between $2,100 and $2,200 an ounce by the end of 2024. The yellow metal has been stoic this year despite rising interest rates and a strong dollar, they note. “The demand side, especially, has started to heat up with central banks buying record amounts of gold.”

Top tickers

Here were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern.

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