For a very long time the stock bull market has been strong based on the fact that economic data was solid and interest rates were low. There was no reason for investors to avoid stocks. Stocks, especially US stocks, have been doing very well in the last 10 years. The US economy has been strong and unemployment is currently with 3.5% at the lowest since a very, very long time.
Panic on bad economic data
On Tuesday a bit of panic in the stock markets started. So far we had mainly been experiencing bad data coming from Europe, where the huge German economy is falling into a recession. A US recession is still quite far away, but a bad ISM Manufacturing PMI caused the US stocks to start a two day sell off. The figure is a barometer of US manufacturing conditions and showed that conditions fell to the lowest since the great crisis in 2009.
On Thursday there was more bad data coming in from the ISM services PMI. Stocks ticked down over 1% immediately and quickly after rebounded to end the day in the plus. On Friday the S&P rebounded another 1.5% after the monthly jobs report that was not bad at all..
Quite some bad news came in, but why did stocks recover that much?
The markets are a little bit in the stage again of bad news is good news. In the sense that the markets do expect the Fed to cut rates more or come with extra stimulus in case the economy shows signs of weakness. With the expectations that the rates go lower on bad data, the enthusiasm comes back as there is no great alternative to stocks at very low interest rates.
Since the beginning of 2018, stock markets have been struggling. Volatility has picked up and stocks have had strong declines on issues like the trade war and bad economic data. Every time the central banks have been able to bring back rebounds in the stock market.
Company earnings season is kicking off soon. It is going to be very interesting to see if the companies can still report satsifying profits. If they disappoint and guide to more weakness to come, the stocks could get into a more serious longer down turn. Some stocks have already experienced these kind of downturns and are ready to be picked up.