On Wall Street, bad may be the new good when it comes to economic data.
Investors believe a weak September jobs report Friday from the Labor Department wouldn’t necessarily be unwelcome. In a twist of logic, negative economic snapshots could lift stocks on hopes central banks might unleash additional stimulus more quickly.
The expectation is that the Federal Reserve, the Bank of England and perhaps the Bank of Japan might embark on a second round of quantitative easing—dubbed by investors as “QE2″—to keep the recovery going. That means Wall Street has been viewing every negative economic report as another reason to snap up stocks.
“It’s almost a win-win situation for equities,” said Owen Fitzpatrick, head of the equity strategy group at Deutsche Bank Private Wealth Management. “That seems like the environment we’ve been trading in for all of September and to some extent October.”
The Dow Jones Industrial Average surged 7.7% last month, marking its best September since 1939, and it has tacked on an additional 1.4% so far in October. The gains have come on mixed readings for the economy, with some better-than-expected reports boosting stocks for obvious reasons while weak numbers have driven gains on the idea of more stimulus.
That effect was evident Wednesday, when payroll giant Automatic Data Processing and consultancy Macroeconomic Advisers reported an unexpected drop in private-sector jobs for September. The Dow responded with a rise of 22.93 points, or 0.2% to close the day at 10967.65.
There are expectations that the Fed and other central banks could deploy a program to buy up to $1 trillion in corporate bonds. Such a move, which would decrease the value of the dollar amid an increase in supply, has investors shifting money out of the dollar into bonds, stocks and commodities.
Weak employment numbers from the government could exacerbate that trend.
“Any time economic data comes in that is below expectations, and let’s say that happens on Friday, that could definitely increase the perception on the part of investors that [the Fed is] going to move and do something,” Mr. Fitzpatrick said. “That to some extent may put a floor on definitely the bond market but also to some extent the equity market.”
Still, the situation is prompting some confusion among investors as they have been forced to split their evaluations of economic reports into two parts: looking at the implications for the economy differently from the takeaway for the stock market.
“Right now we’re in a situation in which investors are torn,” said Adam Sarhan, chief executive at Sarhan Capital. “If the economy falters here, if we get a bad jobs report on Friday, it’s not necessarily a good thing for the economy but it could be a good thing for equities.”
Mr. Sarhan said investors need to keep in mind that what is good for stocks may not be good for the economy, and vice versa.
But with stocks ultimately expected to track the economy over the long term, the dichotomy of the two is unlikely to last. At some point, warns Jerome Heppelmann, portfolio manager at OMCAP Investors, stocks and the economy will have to realign.
“Eventually bad news will be viewed as bad” again, Mr. Heppelmann said. “The economy’s going to determine the growth rate and free-cash flows of your underlying holdings in the stock market.”