Bad News is “Good” for Markets to Close 2023

December 7, 2023 |
2 minute read
|

As we inch closer to 2024, domestic markets have been largely driven by shifts in sentiment surrounding the macroeconomic environment, leading many to question the relationship between “bad news” and market performance.

A year ago, a recession in 2023 was highly anticipated as many foresaw a material rise in unemployment (including this blog). While the labor market has slowed, it has remained far more resilient than most have expected with the four-week average of initial unemployment claims hardly higher than the beginning of the year.

Over the last month, markets have rallied pricing in “goldilocks” conditions of moderating inflation, relatively stable unemployment, and a peak in rates. November marked the strongest month for a traditional 60/40 portfolio since the winter of 1991 as the S&P 500 returned nearly 9 percent and the Bloomberg Aggregate Bond Index returned 4.5 percent in its largest rally since 1985. While strong performance comes as a relief for many, it has been a rocky year for rates. Not only has the shape of the yield curve changed, but domestic rates also have parallel shifted both upward and downward in a wide range between 4 and 5 percent. The 10-year Treasury briefly traded above five percent but has rallied nearly 60 basis points in November. At present, realized volatility on long-dated Treasuries has exceeded that of equities on a one-year basis.1

This Chart of the Month displays the relationship between domestic economic surprises and market performance. Shown below is the Citi Economic Surprise Index and the rolling 3-month correlation between the index value and the S&P 500, as well as 10-year Treasuries.2 For much of the year, economic surprises tended to have opposite directional relationships with stocks and bonds, peaking in the summer as strong economic data led to rates trending towards 5 percent. Additionally, weaker equity performance reflected an environment where good news for the economy was bad news for markets. Since September, however, both stock and bonds have largely moved in concert with economic surprises.

CHT1-Bad-New-is-Good-News

In the final months of 2023, economic data began to slow relative to midsummer highs marked by further weakness in PMI and housing data, as well as slowing nonfarm payroll growth and job openings. Both assets have rallied in response, as shown by the dramatic shift in correlation well into negative territory. This largely reflects that “bad news” in the economy has been good news for market performance, as weakening data supported the end of rate hikes and potential easing (which forward rate expectations now price as soon as March 2024). Such a trend is also reflected in the correlation between asset class performance, which has moved into positive territory yet again as markets traded unidirectionally throughout October and November. While many expect economic data to continue to slow, a key theme through 2024 will be how markets digest the trends in data.

 

  1. Measured by the TLT and SPY ETFs as of December 1st.
  2. The inverse correlation was used for Treasuries to reflect prices rather than yields.
Cameron Dyer

Author

Cameron Dyer

Analyst

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Disclaimer

Certain information contained herein has been obtained from or is based on third-party sources and, although believed to be reliable, has not been independently verified. Such information is as of the date indicated, if indicated, may not be complete, is subject to change and has not necessarily been updated. No representation or warranty, express or implied, is or will be given by The Common Fund for Nonprofit Organizations, any of its affiliates or any of its or their affiliates, trustees, directors, officers, employees or advisers (collectively referred to herein as “Commonfund”) or any other person as to the accuracy or completeness of the information in any third-party materials. Accordingly, Commonfund shall not be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying on any statement in, or omission from, such third-party materials, and any such liability is expressly disclaimed.

All rights to the trademarks, copyrights, logos and other intellectual property listed herein belong to their respective owners and the use of such logos hereof does not imply an affiliation with, or endorsement by, the owners of such trademarks, copyrights, logos and other intellectual property.

To the extent views presented forecast market activity, they may be based on many factors in addition to those explicitly stated herein. Forecasts of experts inevitably differ. Views attributed to third-parties are presented to demonstrate the existence of points of view, not as a basis for recommendations or as investment advice. Market and investment views of third-parties presented herein do not necessarily reflect the views of Commonfund, any manager retained by Commonfund to manage any investments for Commonfund (each, a “Manager”) or any fund managed by any Commonfund entity (each, a “Fund”). Accordingly, the views presented herein may not be relied upon as an indication of trading intent on behalf of Commonfund, any Manager or any Fund.

Statements concerning Commonfund’s views of possible future outcomes in any investment asset class or market, or of possible future economic developments, are not intended, and should not be construed, as forecasts or predictions of the future investment performance of any Fund. Such statements are also not intended as recommendations by any Commonfund entity or any Commonfund employee to the recipient of the presentation. It is Commonfund’s policy that investment recommendations to its clients must be based on the investment objectives and risk tolerances of each individual client. All market outlook and similar statements are based upon information reasonably available as of the date of this presentation (unless an earlier date is stated with regard to particular information), and reasonably believed to be accurate by Commonfund. Commonfund disclaims any responsibility to provide the recipient of this presentation with updated or corrected information or statements. Past performance is not indicative of future results. For more information please refer to Important Disclosures.