When Bad News Produces Good Results

The Dow Jones Industrial Average has moved higher by a staggering 5,127 points since March 23rd, just three weeks ago (data as of 4/12/2020).

That seems so counter-intuitive. Has the news around the world gotten “better” in the last three weeks? Absolutely not.

Someone asked me last week, “what should I do if I know the news is going to keep getting worse”?

I asked them if they were talking about “health” news getting worse, “economic” news getting worse, or “stock market” news getting worse, and their answer was “all three”.

I think it is easy to believe that we will get very sobering health news in the coming weeks, and equally dire economic news over the next couple of quarters. That won’t necessarily result in poor stock market results from these levels. Scary health and economic news may produce poor stock market results, but there have been many instances in history when “bad news” produced good results in the stock market.

If we look back to Thursday March 26th, the weekly jobs report was released, and we learned that 3.3 million people had lost their job the previous week (a new record that would stand for only one week). On Thursday April 2nd we learned that another 6.6 million people lost their jobs. This past Thursday, April 9th, we learned that a new 6.6 million people lost their jobs as well. The three-week total is now 16.5 million job losses.

So what did the stock market do on that news? Let’s look at this chart:

Date	Jobs Lost	Market Reaction
Thursday 3/26	3.3 Million	Dow +1,352 Points
Thursday 4/2	6.6 Million	Dow +470 Points
Thursday 4/9	6.6 Million	Dow +286 Points
TOTAL	16.5 Million	Dow +2,108 Points

On each day that the bad jobs report number was released, the Dow Jones Industrial Average was significantly higher. In fact, those three days alone resulted in an increase of over 2,100 Dow points.

Before I explain the reason for this phenomenon, let me remind our readers that this is not new. There were multiple occasions in 2010-2015 when the stock market moved in a counter-intuitive fashion.

There were days when we were expecting the jobs report to show an increase of 250,000 new jobs, and yet the actual number was only 100,000 – a “miss” of more than 150,000 jobs, and yet the stock market moved higher on that news.

On other days, investors were expecting the jobs report to show an increase of 50,000 new jobs, and the actual number was 200,000 new jobs – a fourfold increase – and yet the stock market would sell off on that news.

So what gives? How can bad news move the stock market higher?

In both the 2010-2015 time period, and our current 2020 period, the Federal Reserve has been very active in providing various stimulus programs for the economy.

Back in the 2010-2015 period, sometimes when “bad” economic news would appear, stocks would move higher, because investors thought that bad news meant the stimulus programs would not be ending anytime soon.

When “good” economic news was released, such as a fourfold increase in jobs, stocks would move lower, because investors thought that too much good news would give the Federal Reserve reason to start pulling back on their stimulus programs.

We have seen the same thing over the past three weeks. Very poor economic news has been met with positive moves by the stock market. Jerome Powell and the Federal Reserve have made it clear that “money is no object” in their plans to support businesses, lenders, and individual families/citizens.

Market Bottom:

With the market moving higher some days on bad news, does this mean that we’ve already seen the market bottom?

I don’t know.

In one of our recent articles – Should we Temper our Expectations – I mentioned that it is not uncommon for the stock market to see huge moves to the upside after periods of violent selling, only to see the lows “retested” several days or weeks later. I think investors have to be prepared for that possibility.

If we do see stocks retreat to their lows, I believe that will be a temporary decline. Ultimately, we will see the US and the rest of the world “reopen”, and at that time we will start to see many (but not all) of the newly unemployed reenter the workforce. Stock prices will ultimately start to reflect that more positive outlook.

For investors who wish they could turn back time and sell all or a portion of their stock holdings as the news was getting worse in March, please read our recent article A Second Chance to look at the possibility of reducing stock exposure at current levels. This is not necessarily a recommendation, as everyone has their personal pain-points during times of great volatility. This article simply points out that current levels offer an opportunity to reduce stock exposure if it would help reduce anxiety and improve the mental wellness of individual investors.

About the author

William B. Burns, Jr. CFP® is a CERTIFIED FINANCIAL PLANNER professional and President of Burns Matteson Capital Management, a Financial Planning and Investment Advisory Firm with clients in 21 states throughout the US. He helps high-net-worth families reduce the worry and anxiety sometimes associated with wealth, allowing families to reclaim that time to reinvest back into their family, social, and professional relationships. www.BurnsMatteson.com