Thankful the Market Doesn't Need Much Good News from Here

Normally an inflation reading of 7.7% is not good news. Unfortunately, things have not been normal for some time.

Reported inflation for October was 7.7%, and in a backwards way, that turned into the best news of the year. The S&P 500 was up 5.5% that day, which was its best one day return of the entire year.

There is a backstory – October was the fourth consecutive month of falling inflation and it was the first-time inflation’s been in the “7’s” since February. So in short, inflation is moving in the right direction.

But a few years ago, inflation printing 40-year highs seemed unimaginable. The market ripping on news like this would have seemed even more unimaginable.

Only Jackie Chiles, the Seinfeld lawyer, can sum up this experience.

In October 2019, inflation was 1.2% and Bloomberg Businessweek led with this headline.

The headline was a sign of the times. Between December 2011 and March 2021, there were 112 straight months of sub-3% inflation. It truly did feel like inflation was dead.

Even prior to the recent inflation number, stocks had been staging a nice rally since mid-October, without any obvious catalyst.

Just another bear market rally? Perhaps.

Another perspective: it doesn’t take much good news for market returns to improve when the lows have been put in.

JPMorgan recently put together a report that shows the historical trend in markets is for stocks to bottom several months before the economic data does leading up to a recession.

As background, a recession sometime next year is the consensus opinion. Per data from Apollo, the chance of a recession happening sometime over the next 12 months is higher any time in the past 50 years, among forecasters.

The summary of JPMorgan report showed stocks tend to bottom months (and sometimes years) before earnings, GDP, and payrolls officially turn higher. You can see the data below for prior recessionary periods between 1950’s and 1990’s below.

A similar dynamic played out during the two most recent crisis – 2008 and COVID.

In 2008, the S&P found a bottom nearly a full year before earnings and payrolls did. During COVID, stocks soared between April and June 2020 despite some of the worst headlines in our country’s history.

The market loves to fool the masses. It seems obvious something should happen, then the plot twist comes, and something else entirely happens. Reality is the stock market doesn’t look through the rear-view mirror, it is always looking forward and pricing in probabilities of what may happen in the future.

As we approach Thanksgiving holiday, it may serve us well to be thankful that it likely won’t take a tsunami of good news for markets to keep improving from here.