Good News Is Bad News

By Nicholas Jasinski  |  Thursday, September 1

U-Turn. Stocks mostly rebounded today, reversing their morning losses to close at their highs of the session. The S&P 500 and Dow Jones Industrial Average each broke a four-day losing streak.

Today's economic data releases included the Institute for Supply Management’s manufacturing purchasing managers' index for August, which held steady at 52.8—solidly in expansion territory. That was above expectations.

The internals of the index were relatively promising, as well. The new orders component returned to expansion, as did employment. And, perhaps most importantly for the market, the prices paid component of the index showed much slower growth than in recent months. It's still rising, but nowhere near as quickly as before. That's another sign of potentially peak inflation already being behind us.

Also released this morning, the latest weekly initial jobless claims came in at a below-consensus 232,000—the lowest level since June—while continuing claims rose only slightly from the prior week.

That's all relatively good news for the economy, but stocks appear to be in a good-news-is-bad-news mood lately. That goes back to the Federal Reserve and the odds of even higher interest rates. A stronger economy means more cover to hike rates in the fight against inflation.

So stock indexes opened deep in the red today as bond yields spiked. The yield on the 2-year U.S. Treasury note rose 0.07 percentage point today, to 3.52%. That's its highest yield since late 2007. On the long end of the curve, the 10-year U.S. Treasury note yield ticked up 0.13 percentage point, to 3.26%—its highest since June.

Higher bond yields tend to be a negative for stocks, and have been behind much of the decline in valuation multiples this year. But with the S&P 500 already down 9% in the past two weeks and on a multi-day losing streak, at least a short-term rebound was in the cards today.

Some of that may be down to technical factors: "With the sharp pullback from the highs, the percentage of stocks in the S&P 500 that are oversold, or stretched to the downside on a short-term basis, has moved to an extreme of about 80%," wrote Truist Advisory Services' co-CIO Keith Lerner. "This is a similar reading to what was seen near the June lows."

After being down as much as 1.3% at its morning lows, the S&P 500 rallied into the close to finish the day up 0.3%. The Dow Jones Industrial Average overcame a similar morning slump to gain 0.5%, while the Nasdaq Composite couldn't quite make it. The growth stock-heavy and particularly rate-sensitive index lost 0.3% today, for its fifth-straight decline. The Nasdaq had been down as much as 2.2% earlier in the day, though.

There will be plenty more focus on the economic data tomorrow. The August jobs report comes out at 8:30 a.m. ET.

"In more normal times, investors wish for a strong labor market—more jobs and lower unemployment—as a reflection of economic vibrancy," wrote Credit Suisse's chief U.S. equity strategist Jonathan Golub today. "However, with labor in painfully short supply, inflation troublingly high, and the Fed espousing their hawkishness, readers of Friday’s Employment report will be focused almost exclusively on its inflationary implications."

In other words, good news could turn out to be bad news once again.

DJIA: +0.46% to 31,656.42
S&P 500: +0.30% to 3,966.85
Nasdaq: -0.26% to 11,785.13

The Hot Stock: DXC Technology +7.8%
The Biggest Loser: Nvidia -7.7%  

Best Sector: Health Care +1.6%
Worst Sector: Energy -2.5%