Is bad news ever good for stocks? JPMorgan

 The more hawkish shift in Fed communication complicates the
relationship between the stock market and economic data. Is rising jobs
growth good for stocks, as we would normally expect, because it
signals a stronger economy? Or is it counter-intuitively bad for
stocks, because it brings monetary tightening closer?
 In this note, we examine how the impact of economic data on markets
varies over the economic cycle, by constructing Economic Sensitivity
Indices, measuring the changing reaction of US stock and bond markets
to economic surprises over time (see Figure 1).
 We find that: (i) it is quite unusual for good data to be bad for stock
prices, or for bad data to be good for stocks, over a sustained period, (ii)
the notable exception is that the stock market reaction to economic
data has tended to be limited or even negative during Fed tightening
cycles, and (iii) stock markets have been increasingly less sensitive to
economic data over the course of this year. This shift is likely to
continue as we move further along the path towards tightening.
 The bond market reaction to economic data is much more consistent
over time than the stock market reaction. This divergence underpins
the positive bond-equity correlation observed around the last two Fed
tightening cycles, in contrast to the negative correlation more typical in
recent years. And it means that short duration positions are likely to be a
more effective way of expressing a positive view on economic data
releases than equity longs.

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Conclusion
We highlight four takeaways from this analysis:
First, it is rather unusual for good data to be bad for
stock prices, or for bad data to be good for stocks, over a
sustained period.
Second, the notable exception to this is during
tightening cycles: the stock market consistently reacted
negatively to good data during the 1999-2000 Fed
tightening cycle, and showed little net reaction to
economic data during the 2004-2006 tightening cycle.
Third, stock markets have been increasingly less
sensitive to economic data over the course of this year.
This shift is likely to continue as we move further along
the path towards tightening. That said, it is very difficult
to gauge the point at which the stock market may be most
focused on the implications of stronger data for tighter
monetary policy. We are still likely around two years
from the first Fed rate hike, but forward guidance means
that the greatest market reaction will surely come some
way before that first hike.
Moreover, we believe a regime where the stock market
displays a limited reactions to good economic data on
average (i.e. the positive impact from growth is roughly
offset by the negative impact from monetary tightening,
as in 2004-2006) appears more likely than one where the
stock market reacts consistently negatively to good
economic data (i.e. the positive impact from growth is
outweighed by the negative impact from monetary
tightening, as in 1999-2000).
Fourth, an increased focus on Fed tightening likely
makes the government bond market a more effective
vehicle for expressing views about economic data
releases than the stock market, because the bond
market reaction to economic data is more consistent.