Text size

Signs of health in the economy just aren’t what they used to be.

When the Bureau of Labor Statistics reports the employment figures for May on Friday, investors will be looking to see whether the labor market is still improving—and whether the economic recovery is on track. But positive news is less likely to move the stock market than it would have this spring, or last year.

Even as strong economic data and other signs of strength have emerged over recent weeks, the

S&P 500

has fallen about 0.3% from its all-time high, hit May 7.

In the past three months, the S&P 500 has averaged a 0.12% gain on days when the price of oil rises, according to Credit Suisse data. In the past year, a daily upward move for oil, often seen as a reflection of expectations for better demand, has come with a gain of 0.32% in the market benchmark.

Similarly, gains in the index over the past three months have averaged 0.2% on days when the so-called 10-year Treasury break-even rate—a measure of expectations for inflation—-has increased. For the past year, the gain has averaged 0.42%.

And when the yield on the 10-year Treasury note has risen, signaling expectations for inflation and tighter monetary policy, stocks have fallen slightly, in contrast to a 0.27% rise in the past year. A narrowing gap between yields on high-yield bonds and risk-free Treasury debt—indicating investors see strengthening corporate creditworthiness and profitability—has resulted in a 0.08% S&P 500 gain. In the past year, narrowing spreads brought an average daily gain of 0.33% for stocks. 

The difference in reaction is because stock prices already reflect the economic rebound. Inflation is now seen as a threat to stock valuations, whereas before it was primarily a validation of the thesis that demand was recovering.

Any indication that inflation is heating up is likely to affirm concerns that the Federal Reserve will soon take actions that would effectively lift bond yields, a negative for stock valuations. Although earnings growth is exploding and is on track to surpass pre-pandemic levels for 2021, the average stock is already trading at around 21.5 times the earnings expected for the coming year. Some strategists see that number falling back.

Stocks might need a new catalyst for meaningful gains. 

Write to editors@barrons.com