Good News Is Bad News: Reading Friday’s Market Drop

You may have seen the headlines on Friday. The market had its sharpest one-day decline in some time, and the press made the most of it. It wasn’t even approaching a 4% decline but I want to give you my own read, in plain terms.

Start with how unusual the day was. A drop that size is not a regular occurrence. The broad investment markets had gone months without anything close to it, riding a long run of weekly gains right up until Friday. Days like Friday feel alarming precisely because they are uncommon, and the coverage tends to make them feel larger than they are.

What actually happened is more interesting than the headline, because two things collided. First, a narrow group of technology and semiconductor names that had run up extraordinarily far and fast finally took a breather. That was overdue, and it was concentrated, not broad. Second, and this is the part worth sitting with: Friday’s jobs report came in strong. On its face that is good news, an economy still creating jobs. But strong employment also raises the market’s worry about inflation, and that pushed bond yields higher, which in turn pressures stock prices, particularly the richly valued growth names. The same good news cut both ways and it reminds me of a common phrase heard throughout my career: Good news is actually bad news.

There are myriad ways to deal with the expected inflation from the good jobs number but increasing productivity across all jobs, businesses, and industry is the most effective and enduring solution. Artificial Intelligence, when used, is clearly showing a productivity increase, but there’s significant fear that the result will be a loss of jobs. I disagree fundamentally and this week’s report on jobs belies the claim. More jobs might be inflationary, but productivity increases are always deflationary, so AI doesn’t have to mean net job loss and I’m betting it won’t.

There is also a quieter factor in the market’s mood right now. A wave of very large, highly anticipated public offerings is coming, SpaceX chief among them, with others close behind. Some investors appear to be trimming winning positions to free up cash for what is next. It is probably a marginal influence, but it adds to the restlessness, and I think it is shaping the market’s personality at the moment more than its fundamentals are.

Now, specific to how we invest. We deliberately carry less exposure to the most crowded, most richly priced names than the headline indexes do, and on a day like Friday that discipline does what it is meant to do.

The larger point, and the real reason I am writing: based on everything I can see today, I find no indication that Friday is the start of a sustained decline and I am watching it closely. But a single sharp session, even a loud one, is a normal part of investing, not a signal on its own. Our job is to keep each client’s portfolio built so that days like this are survivable, and so that it stays suited to their circumstances, rather than to the market’s mood of the week.

If you’re nervous or uncertain and would like to talk any of this through, I am glad to talk anytime to help Put You At Ease.

We’re always grateful for the trust our clients put in us.