I was speaking with a friend yesterday who asked me why the market as down so much. I said, "It's because we got some bad news on the economy." He said, "I thought the bad news was good because it puts the Fed on pause." I shook my head and told him he was so 2022.

I am being facetious but this is honestly a question that gets asked on a lot of buy and sell side trading desks throughout the year: is good news good news or is good news bad news and vice versa.

It is not always easy to answer but when you get a clear signal from the mkt via price, you should take notice. Price is the intersection of supply and demand and so when one of those overwhelms the other based on news, it is important.

This is why I encourage, if not plead, with my students who are covering names in our various student portfolios that they need to stay on top of those names every day. We can learn a lot from the reaction to news.

Yesterday we got bad news on retail sales, industrial production, Empire services (after a brutal mfg the day before) & indus prod/capacity utilization. One might argue the PPI was good news.

Yesterday struck me as the day we went from 'bad news is good because it means the Fed will pause, that the bond mkt is right and JayPo is wrong." to "bad news means a bad economy which means bad earnings."

Companies corroborated the story by reporting bad earnings. We have now seen bad news from the likes of Goldman, Disney, Tesla, & Delta. Last night we got more from Alcoa, Vornado & Discover. These are bell-weather names that all had a very downbeat view on the economy.

After all, the economy drives earnings and earnings drive stocks. Particularly when we are in a higher for longer rate environment. In my Substack I talked about the big difference between bulls and bears right now is $170 vs. $230 in S&P earnings for the year.

If we say the Fed is paused and 17.5x P/E is correct, then if you believe the 230 number you can justify 4000 S&P. If you believe in the 170 number instead, you think the S&P should be 3000.

Investing as well as trading is about having a margin of safety, about a good reward to risk ratio. Your entry level should be a function of your perceived downside risk vs. your target price.

Yesterday, the feeling that 230 for the year (roughly flat) might be a bit optimistic started to crystallize in investors minds. A buyers strike ensued. Stocks are all going to hinge on the view of earnings for the year and much less on Fed policy.

The chart today is the SPX vs. the Economic Surprise Index. You can see early last year bad news was bad news. Then the bad news became good news as the hope of a Fed pivot came into play. JayPo then got all hawkish at Jackson Hole and good news was bad news. We are back to bad news being bad news.

Whatever your view of the Fed it is probably not the marginal driver from here. Now it is all about the economy and earnings.

Stay Vigilant

#markets #stocks #economy #earnings