Good news could be bad news for equities from now on: BofA

Investing.com -- Bank of America analysts warned that the equity market is entering a phase where positive economic news may no longer be welcomed by investors. 

In a note, BofA highlights a shift in market sentiment, with stronger economic indicators potentially leading to adverse reactions in stock prices.

BofA forecasts a "solid December jobs report," expecting nonfarm payrolls to increase by 175,000. 

This would mark a slight decline from November's 227,000, which included a rebound from hurricane disruptions. Despite this, the unemployment rate (U-rate) is predicted to hold steady at 4.2%. BofA notes, "This would be encouraging, given that the U-rate nearly rounded up to 4.3% in November."

However, this encouraging economic data could prompt a shift in Federal Reserve policy. BofA's base case anticipates "further modest labor market weakness," leading the Fed to implement two more rate cuts in March and June. 

Conversely, if the labor market stabilizes quickly, the current rate-cutting cycle may already be complete, which could have significant implications for equities.

The analysts point out that the market is transitioning from a "rates up, stocks up" dynamic to a "good news is bad news" scenario. 

They explain, "With the 10-year firmly above 4.5%, we believe the market is shifting into a 'good news is bad news' environment again."

Over the past two years, the correlation between the S&P 500 and the 10-year yield has been closely tied to the direction of the 10-year, particularly in the 4.00-4.25% range, notes BofA.

The bank also highlights increased volatility in equities, stating that "equities have been more reactive to macro news since the US election."

 

Source: Investing.com