I have been writing about the economy and the stock market for almost 20 years now. During that span I have seen the market go through many different phases.
There are phases when the market views everything as bad news, and there are ones where all news is viewed as good news. There are even ones where good news is good and bad news as bad.
But the ones that confuse me are the ones where good news is bad for the market, and bad news is good for the market. And we might just be entering another one of those phases.
Monday saw a bunch of economic data hit the wires from China, to Europe, to the U.S. The news out of China was good, the news out of Europe was bad, and the news at home was mixed. The market seemed to focus on the good news out of China.
The purchasing managers’ index for China got stock futures moving higher late on Sunday night. The index came in at 50.5 for March, up from 49.2 in February. Dow futures jumped approximately 150 points on this news. There are two aspects to the PMI out of China that are encouraging. First, the reading is the best we have seen in the last six months. Secondly, and perhaps even more important, the reading was above 50. The 50 level is considered the demarcation point between expansion and contraction. Readings above 50 are a sign of economic expansion while readings below are considered a sign of contraction.
The news out of Europe wasn’t nearly as rosy as the HIS Markit Purchasing Managers’ Index for the Eurozone fell to 47.5 in March. The reading was below expectations and below the 49.3 reading in February. The drop was the biggest in the last six years. At the heart of the problem for the Eurozone was Germany’s PMI which fell to a reading of 44.1 and that is the country’s lowest PMI reading since 2012.
In the United States, the Institute for Supply Management’s monthly index of manufacturing activity jumped up to 55.3 in March, up from 54.2 in February. Like the PMI numbers, readings above the 50 level are an indication of economic expansion. The overall reading was better than the consensus estimate of 54.1 and that was encouraging. Another aspect that was encouraging was that the new orders segment of the index came in at 57.4, and that was up from 55.5.
As far as the bad news from the U.S., we have the retail sales figures for February. Overall sales were down 0.2%, and the consensus estimate was for an increase of 0.2%. If you take auto sales out of the equation the numbers were even worse. Excluding autos saw retail sales fall 0.4% when the estimate was for an increase of 0.3%. For the overall numbers, this is the fifth month out of the last seven where sales have declined.
What concerns me is that the U.S. economy relies more heavily on retail activity than it does manufacturing activity. That isn’t meant to dismiss the good news from the ISM report, but the market barely budged on the poor retail sales figures. That makes me think that investors are entering that phase that “bad news is good for the market” because they think that will pressure the Fed to lower rates in their next move rather than hiking rates.
The news out of China is certainly a welcoming sign for the global economy. China is now the second largest economy behind the U.S., and they are a huge trading partner with both the U.S. and Europe. If China can get back on the right track, that could benefit almost all countries.
Of course, we are still waiting on a trade deal to be announced between the U.S. and China and that could also give global equity markets a boost. Europe seems to be getting hit the hardest at this point, but the different economies are so interdependent on one another, it’s hard to see a slowdown in Europe not impacting other economies. If China truly has turned the corner, that could be the boost that Europe needs to turn things around as well.
I am not ready to move to the “bad news is good for the market” phase. Personally, I think investors need to focus on investing in good companies and stop worrying about the Fed so much. I would be more worried if the Fed cut rates than if they raised rates at this point. I think they made the right move by moving to a neutral stance in the last meeting, now let’s just wait and see where we go from here.