Investors used to believe that bad news was actually good news for the economy. However, there has been a major change in their thinking. Recently, the market has been hoping for positive monthly economic reports that would convince the Federal Reserve to slow down its efforts to increase interest rates and control inflation.
In March, following a few bank closures that raised worries about the economy’s reliability, the central bank indicated that it intends to halt increasing interest rates at some point this year. Investors have shifted their focus from predicting the Fed’s future actions to assessing the state of the economy as interest rate hikes end.
Previously, when economic data showed signs of weakness, it was seen as positive news as it meant that the Federal Reserve might stop increasing interest rates. However, when economic data shows signs of weakness, it suggests that the overall economy is weakening, making investors nervous about a potential recession.
The Events Last Week
The markets were unstable due to several economic reports indicating that the previously strong job market was beginning to slow down. This caused concern among investors and led them to sell off high-growth, large-cap stocks that had been performing well and instead invest in defensive stocks in industries such as healthcare and consumer staples.
Although there was some improvement in technology stocks towards the end of the week, the Nasdaq Composite index still experienced a decline of 1.1%. The S&P 500 index also decreased slightly by 0.1%, while the Dow Jones Industrial Average increased by 0.6%. It is important to note that the markets were closed on Good Friday.
What This Means
Currently, Wall Street is focused on the idea that negative news will have negative effects and positive news will have positive effects. Investors are searching for indications that the economy can withstand challenges.
One constant is that investors desire to see a decrease in inflation. Despite the central bank’s announcement that they will not increase interest rates this year, inflation rates have only slightly stabilized.
The Fed’s preferred inflation measure, the Personal Consumption Expenditures price index, increased by 5% over the last 12 months, which is significantly higher than their targeted 2% inflation rate.
The expectations of Wall Street towards the actions of the Federal Reserve may be too positive.
Some investors anticipate that the central bank will reduce interest rates multiple times in the current year, even though it has announced that it does not intend to do so until 2023.
It remains uncertain how the markets will react if the interest rates are not decreased this year.
However, George Cipolloni, a portfolio manager at Penn Mutual Asset Management, believes there won’t be a significant surge in the markets unless the Federal Reserve changes its stance or at least indicates that it plans to do so soon.
The Labor Market
Recent data suggest that the labor market is slowing down, but it is premature to conclude that it has weakened. President Joe Biden has expressed positive views on the March data, calling it a favorable report for hard-working Americans.
The latest job report for March showed that American companies only added 236,000 jobs to their payrolls, which was lower than the estimated 239,000 jobs predicted by economists. However, the unemployment rate decreased to 3.5%, which was lower than the expected rate of 3.6%.
The latest job report did not meet expectations, and it’s been a year since this has happened. However, it does not necessarily indicate that the job market is no longer strong.
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