The Return of Good News / Bad News Confusion

is the market sufficiently prepared for the possibility of a rate hike yet? Probably not, judging by the reactions we’re seeing in stock prices to recent economic reports.

Over at the BlackRock Blog, Russ Koesterich makes the point that market participants have gotten back to the old game of rejoicing over bad news and growing fearful when the data gets too positive.

The curious notion that good news is bad news, and vice versa, doesn’t help calm the markets either. Case in point, the February U.S. employment report showing 295,000 new jobs is in and of itself stellar, but it seemed to confirm fears for some that the Fed would move to raise interest rates sooner rather than later. Stocks tumbled -1.42% as a result on March 6. By contrast, U.S. retail sales fell three months in a row, yet stocks rallied 1.26% after its February report release on March 12. We think the good news/bad news dynamics will get worse as the Fed rate hike draws closer. Watch out for a greater amplification of this volatility.

My own view is that the market is in the process of getting ready. Which means the (slight) uptick in volatility this year is entirely understandable and should not be a shock. When people grow uncertain, they make trades and shift around their portfolios to match up with a new set of expectations. These trades move prices around and create the volatility on your quote monitor.

NBD.

Source:

Welcome Back, Volatility (BlackRock Blog)