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CAPITAL IDEAS: When is ‘good news’ bad news for the stock market?

I think that this particular good news—more jobs—will be good for the economy and won’t interfere with the Fed's plans for interest rates (whatever those plans may be).

Recent economic reports reveal that average hourly earnings growth is leveling off around 4.1 percent, which is a healthy rate but not so high that it threatens to spiral inflation upward.

Chart courtesy of the U.S. Bureau of Labor Statistics.

Yes, I continue to monitor inflation. Inflation is the number one factor affecting the economy and the stock market. Inflation drives monetary policy designed by the Federal Reserve. Moreover, inflation is why so many Americans feel lousy about the economy despite many new jobs and healthy aggregate economic growth.

Monetary policy is a set of tools the Federal Reserve uses to adjust employment and prices. One of those tools, of course, is the federal funds interest rate. The stock market is begging the Fed to cut rates. I still think the Fed should not cut rates in 2024, but I expect them to give in to the pressure and cut—so long as the economy doesn’t run too hot and reignite inflation. Others don’t believe that either scenario—leaving rates where they are or cutting them—is the right call.

There have been whispers on Wall Street that the Fed’s next move might be to raise rates—not cut them—because the economy is so robust. Given that there were 303,000 jobs created in the U.S. in March 2024 and similar amounts in previous months (albeit many were part-time jobs), that is not an unreasonable assertion on the surface.

Chart courtesy of the U.S. Bureau of Labor Statistics.

The reheating of the labor market will not necessarily deter the Fed from cutting rates. A rising labor supply accompanies the strength in the jobs market. The labor force increased by 2.4 million workers from December 2022 to December 2023. Over that same period, excess labor demand in the U.S. fell by 50 percent. (The Fed refers to the gap between the employment level plus jobs open and the civilian labor force as “excess demand.”)

American companies can fill open job positions without raising wages excessively and, in turn, raising inflation.

It may seem weird that I must explain that job creation should be a good thing for the stock market—job creation is a good thing. But sometimes stocks see good news as bad news.

Thirty years ago, I was interning at Smith Barney, a former brokerage house that has since been acquired. I remember a seasoned broker quitting because it flustered him so much that stock prices often sold off on good news for the world. Then, stocks would rise in price when the information was terrible. I understand how that can wear on a soul. However, the broader point is that it is not a recent phenomenon. For the stock market, sometimes good news is good news, and sometimes good news is bad news.

I think that this particular good news—more jobs—will be good for the economy and won’t interfere with the Fed’s plans for interest rates (whatever those plans may be).

But like I said, regarding the stock market, not all good news is good news. Investors are feeling ebullient, and that is good news for consumer sentiment. However, as a contrarian, I view bullish investors as a contrarian indicator.

Often, the best time to buy stocks is when investors are so bearish that they have sold all their stocks and driven prices down.

Sometimes, the worst time to buy stocks is when investors are excessively bullish, and everyone who would buy stocks has done so, leaving little demand to pull stock prices higher.

People surveyed by the American Association of Individual Investors are currently more bullish than historical averages.

Chart courtesy of the American Association of Individual Investors.

Bespoke averaged a couple of sentiment indicators—AAII and Investors Intelligence—and compiled them into deciles. Those sentiment indicators are currently at their most bullish deciles.

Chart courtesy of Bespoke.

The average one-year return for the S&P 500 after reaching such bullish levels is a meager 2.96 percent. A three percent annual return would not be a disaster for investor portfolios, but it is hardly a return deserving of such bullish emotions.

The bull/bear spreads of various sentiment indicators have been elevated and near a high since February 2018. The stock market corrected 10 percent from February 2018 to April 2018, a span of four months. From those 2018 lows, it took eight months for the stock market to recover. Suppose something similar transpired for the stock market throughout the next 12 months. In that case, the S&P 500 has hit its highs for this calendar year and would hit a correction low around August 2024. Then the index would rebound and reclaim those previous highs in early 2025. Despite the anticipated volatility, I remain invested in stocks for now.

Allen Harris is an owner of Berkshire Money Management in Dalton, Mass., managing more than $700 million of investments. Unless specifically identified as original research or data gathering, some or all of the data cited is attributable to third-party sources. Unless stated otherwise, any mention of specific securities or investments is for illustrative purposes only. Advisor’s clients may or may not hold the securities discussed in their portfolios. Advisor makes no representations that any of the securities discussed have been or will be profitable. Full disclosures here. Direct inquiries to Allen at


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