Is bad news good news again for investors?
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It seems stock markets may have returned to an upside down, ‘bad news is good news’ dynamic popularized more than a year ago when the Federal Reserve was also contemplating its next move toward normalizing U.S. monetary policy.
On Monday, the first trading day after the release Friday of a deeply disappointing March jobs report, stock markets rallied, pushing the Dow Jones Industrial and S&P 500 indexes back into positive territory for the year.
The enthusiasm for buying stocks was buoyed by the notion that the lousy March jobs report, which revealed that a meager 126,000 new jobs were created last month, will persuade Fed policy makers to hold off on raising interest rates, possibly until 2016.
“It appears as if the Fed’s plans for raising rates are going to stay on hold perhaps even longer than we thought, possibly into 2016,” said Peter Cardillo, chief market economist at Rockwell Global Capital.
New York Fed Chair William Dudley contributed to the sense that the Fed remains in no hurry to raise rates, saying in a speech Monday morning that the timing remains uncertain and dependent on economic data.
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Neither point is new to Fed policy makers, but their significance is magnified in the wake of Friday’s weak jobs report.
The theory is that higher interest rates will make it more expensive to borrow money, which will eventually cut into corporate profits and drag down company stock prices. So the longer the Fed waits the longer the current bull market will run.
Dudley told a business group in New Jersey, “It will be important to monitor developments to determine whether the softness in the March labor market report evident on Friday foreshadows a more substantial slowing in the labor market than I currently anticipate.”
More than a year ago investors bid up stocks whenever they believed poor economic data would prompt the Fed to put off phasing out its monthly bond purchasing program known as quantitative easing. The program ended in October.
Irrelevant Time Frame
Earlier this year, at least before an array of first quarter economic reports revealed broad weaknesses across the economic landscape, the Fed was widely expected to start raising rates in the summer.
That time frame may no longer be relevant.
“The weak jobs report took a lot of people by surprise,” Cardillo explained. “The question is, is this an aberration. I don’t think so. What the employment data, as well as some other recent reports, suggests is that the economy has slowed down and is suffering from two factors – a strong dollar and low oil prices.”
But Cardillo said the ‘bad news is good’ trading strategy is likely to reverse itself beginning later this week with the start of earnings season. Those two factors – the strong U.S. dollar and low oil prices – are expected to cut into corporate earnings, and investors aren’t likely to interpret that as good news.
Earnings season kicks off this week with Alcoa (NYSE: AA) releasing its results on Wednesday. Analysts are forecasting profits for S&P 500 companies fell 5.8% in the first quarter with results beaten down by sliding oil prices and the stronger dollar.
Monday’s rally, which tapered off a bit late in the trading session, was fueled by a run on energy stocks, helped out by a surge in the price of oil. The Dow closed up Monday 117.61, or 0.66%, at 17,880, and the S&P 500 closed higher by 13.66, or 0.66%, at 2080.
NYMEX crude rose 6%, the largest gain since February, to $52.14 a barrel, its highest price since March 26, thanks in part to a falling dollar and news that Saudi Arabia raised the price of oil it sells to Asia for the second consecutive month.
The move in oil provided a big lift to shares of oil and gas drillers and exploration and production stocks such as Transocean (NYSE: RIG), Cimarex Energy (NYSE: XEC), and ENSCO (NYSE: ESV). 39 of the 41 energy stocks in the S&P 500 are higher, with the S&P 500 Energy Sector Index reaching its highest level since February 27.