Why Bad News Makes the Stock Market Happy

Floor of the NYSE -- Pictured: (l-r) CNBC's Melissa Lee, Jim Cramer -- (Photo by: Charles Sykes/CNBC/NBCU Photo Bank)
Charles Sykes/CNBC/NBCU Photo Bank

For now, bad news is good for the stock market.

Investors judged that the latest weak economic reports will make it more likely that the Federal Reserve will continue to stimulate the economy and support a rally on Wall Street.

On Monday, a measure of U.S. manufacturing fell in May to its lowest level since June 2009 as overseas economies slumped and weak business spending reduced new orders to factories.

That helped convince investors that the Fed will hold off from slowing down its $85 billion bond-buying program. Speculation that the central bank was set to ease that stimulus, a major support for this year's rally in stocks, has caused trading to become volatile in the last two weeks.

The Standard & Poor's 500 index fell in the morning after the manufacturing report was published at 10 a.m. It moved between gains and losses for much of the day, then climbed decisively in the last hour of trading.

The "good news is bad news" interpretation of economic reports may support stocks in the short term, but at the end of the day the economy has to keep improving for stocks to reach new highs, said Alec Young, a global equity strategist at S&P Capital IQ.

"This was a big miss on the ISM report," said Young. "Regardless of what it means for the Fed, ultimately you're buying a stream of earnings and you want to see the economy doing well."

Federal Reserve Bank of Atlanta President Dennis Lockhart also helped allay investors' concerns that the central bank was poised to stop the stimulus. He told Bloomberg Television Monday in an interview that Fed officials remain committed to the stimulus program.

The S&P 500 index climbed 9.68 points to 1,640.42, up 0.6 percent. The Dow Jones industrial average rose 138.46 points to 15,254.03, a gain of 0.9 percent. The Dow got a boost from Merck, which rose 4 percent.

The Nasdaq composite, which is heavily weighted with technology stocks, rose 9.45 points to 3,465.37, an increase of 0.3 percent.

The yield on the 10-year Treasury note ended the day barley changed from late Friday at 2.13 percent. The yield climbed as high as 2.17 percent in early trading, then fell as low as 2.09 percent after the manufacturing report was released.

As Treasury yields fell, rich dividend-paying stocks like electric utilities and phone companies moved higher. Those sectors, so-called defensive stocks, had been investor favorites in the first quarter. They declined in May as bond yields rose.

Despite the advance Monday, signs are emerging that this year's rally may be starting to falter. The S&P 500 index closed higher for a seventh straight month in May, but the index also logged its first back-to-back weekly declines since November. On Friday the Dow plunged 208 points, its worst drop in six weeks.

The Dow is still up 16.4 percent this year, and the S&P 500 is 15 percent higher. Stocks have surged as companies reported record earnings and on optimism that the housing market is recovering and hiring is improving.

In commodities trading, oil climbed $1.48, or 1.6 percent, to $93.45 a barrel. Gold rose $18.90, or 1.4 percent, to $1,411.90 an ounce. The dollar fell against the euro and against the Japanese yen. The U.S. currency dropped back below 100 yen for the first time in three weeks.

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Mondays news about the stock market being reported today (Thursday) really makes a lot of sense. If this article was true the DOW would not be in the negative right now.

June 06 2013 at 1:27 PM Report abuse rate up rate down Reply

yep-failing upward.

June 06 2013 at 12:25 PM Report abuse rate up rate down Reply

just sit back and watch it go down, when it does it will stop at a certain point, then all heck will break loss in the bond market, the USA will plunder into another recession, all stuff the we need to live off of will spike high. Then the feeding will start all the rich will not have the little guy to squeeze money out of so they will start attacking each other, the government is already doing it to large companys, its the only place to get money from.For short the sharks will be eating the other sharks. These big shots will have to pay law firms billions to keep all the money they get off wall street and they will end up broke. It takes a lot of money to stay rich these days and the years to come. Like the old saying goes what goes around comes around. If the bond market Pop,s the feeding will state like crazy. State goverments will be going after anyone with money, because the average guy dosen,t have it and they know it, so they won,t waist there time. Sit back and watch it happen sip on a beer and watch them start crying, and make sure you have enough hard cash like silver, because that white metal will have a lot of trading power.

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June 04 2013 at 4:29 PM Report abuse -1 rate up rate down Reply