What's good for America might be bad for stocks

As readers of the Morning Brief know, the U.S. economy has been exceeding expectations left and right.

But a few pieces of Wall Street commentary over the last several days have noted that bursts of economic activity on this scale historically put the market under some pressure. 

Which could set the stock market up for a correction of sorts in the months ahead. 

As my colleague Brian Sozzi highlighted in a piece on Yahoo Finance on Tuesday, Deutsche Bank's Binky Chadha notes that the recent spike in activity measures from the Institute for Supply Management — which the Morning Brief covered here and here — suggest a flattening out or peaking of activity in the coming months. And after accelerations higher, these moderations in economic activity have typically been accompanied by modest declines in the stock market. 

"Growth (ISM) typically peaks around a year (10-11 months) after recession ends, right at the point we would appear to be," Chadha writes. "A majority of historical peaks in growth (two thirds) were inverted-V shaped, while the rest saw the ISM flatten out at an elevated level. The S&P 500 sold off around growth peaks by a median -8.4%, but even episodes which saw the ISM flatten out rather than fall, saw a median -5.9% selloff."

Earlier this week, Charles Schwab strategist Liz Ann Sonders also flagged work from analysts over at Goldman Sachs who note that when the ISM's manufacturing activity reading exceeds 60, the S&P 500 tends to be lower over the next three- and six-month periods. In March, the ISM's manufacturing activity index registered a reading of 64.7.

And these firm data points help bring into focus an idea that has been percolating through the Morning Brief in recent weeks, which is that what is good for the U.S. economy and daily life normalizing after the pandemic shock might not be great for markets. These data also serve as another way to say, as we did last week, that what has been working over the last year might not work in the months ahead. 

"At this point, the bullish narrative of a recovering/reopening economy is very much the consensus view," Morgan Stanley's Mike Wilson said in a recent note. "That doesn't make it wrong, but markets are discounting machines and may already reflect the recovery from last year's sharp recession."

Everyone, in other words, already knows what the most bullish story is right now for markets. And more bursts of good news won't really change the outlook for an index that has already rallied ~80% in a year. 

For the last year, we've chronicled the various ways markets have remained focused on prospects for an economic recovery and an associated bounce in corporate profits. Surges in the virus, the expiration of fiscal stimulus, and questions over the outcome of the presidential election, among other concerns, all at various points presented investors with serious questions about the health of the market rally. 

The response from strategists and the market's action suggested that so long as the future looked better than the present, these worries could be shaken off. But with these anticipated surges in economic growth now coming to pass, the question facing investors is where the next leg of growth comes from. 

And more good news — let alone news that shows growth moderating just a bit — might not cut it.

This article originally appeared on Yahoo! Finance.


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