Black Friday Sale! Save huge on InvestingProGet up to 60% off

Bad news has been good news for equities but that could be about to change: BofA

Published 04/06/2024, 09:50
© Reuters.
US500
-

Although bad news has historically served as a catalyst for equities, this trend might be about to reverse, Bank of America (NYSE:BAC) strategists said Monday.

Over the past two months, there has been a negative 78% correlation between the S&P 500 and the USD, indicating that bad economic news often led to stock market gains. However, BofA warns that this dynamic could change if economic growth deteriorates further.

Specifically, the bank’s strategists point to a critical range for nonfarm payrolls (NFP) as a bellwether for the stock market.

“We believe the goldilocks range for NFP is +125-175K, which would maintain the unemployment rate largely unchanged assuming labor supply growth remains at or above today’s level,” analysts said in the note.

“Sub-125K gains in NFP could increase the risk of triggering the Sahm Rule*, reviving recession fears in the market. As long as inflation remains in check, stronger growth should also be positive for stocks,” they added.

In recent forecasts, BofA expects the NFP to increase by 200,000, up from 175,000 in April. However, the unpredictability of NFP data poses risks. The S&P 500 has shown similar volatility on NFP release days as it has on Consumer Price Index (CPI) days over the past year.

Despite this, market complacency is evident, with SPX options pricing in the fourth-lowest NFP implied move since the onset of the COVID-19 pandemic, strategists noted.

The implications of this week's macro events extend beyond employment data. The ISM manufacturing PMI, set to be released earlier in the week, and the European Central Bank's (ECB) rate decision will also play a pivotal role.

BofA expects the manufacturing PMI to improve but stay below 50, signaling continued contraction, while the ECB is anticipated to cut rates.

Feel ready to dive into details and start finding interesting stocks to invest? Try our AI supported solution InvestingPro today!

Get an extra 10% discount by applying the code UK10 on our 1&2 year plans. Don't wait any longer!

How to buy pro InvestingPro

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.