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Why economic growth could cause trouble for stocks: Morning Brief

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Yahoo Finance’s Myles Udland, Brian Sozzi, and Julie Hyman discuss impacts the economic recovery can have on the market.

Video Transcript

MYLES UDLAND: We are talking about something I was finally able to put into writing with some backing from some folks on Wall Street, a theme that we have discussed on this program for weeks now, maybe even months. But the idea that what is good for us, good for Americans, good for the economy may not necessarily be great for the stock market.

And, Brian Sozzi, I know you also took a look at this research. Let's start with a note from Bankim Chadha and the team over at Deutsche Bank. They're looking at a pretty simple metric here, ISM readings. Those are the services and manufacturing sector readings that we talk about that cross at 10:00 AM and the first week of every month. They are through the roof right now, record levels indicating an expansion at a rate we have not seen in decades. But Soz, that is typically accompanied by a more modest period for stock returns.

I find this somewhat compelling. Of course, market history is not the most robust thing in the world. But it does make some intuitive sense, right? We have anticipated this kind of growth. And now that it is being realized, we see the market may be under just a smidge of pressure relative to what the story would have been a couple of months ago.

BRIAN SOZZI: Well, Myles, I see you're compelling, and I raise you an alarming. Because now you're back-- and we've talked about this extensively, not just this week, really, the past year and a half, that now, if you're long the market, maybe you should be rooting for less big beats than we saw on the jobs numbers or less big beats than we saw in the ISM data, which we talked about in the brief earlier in the week. Deutsche Bank saying they are envisioning this peaking in data, notably the ISM, a 6% to a 10% consolidation.

Now, Myles, I did find it interesting here. They didn't say sell-off. They said consolidation in markets as a result of that peaking data. And they said it could happen within a couple of months. Obviously, you can't pick any of the stuff. You might as well just throw a dart at the board and try to predict when the market might pull back. But again, now this place has a lot more emphasis on, does a market embrace good data? It did after the latest jobs data, but Deutsche Bank saying something completely different.

MYLES UDLAND: Yeah, and I think, Soz, you know, that's interesting. It's the right way to say it because we're a year out from the market legitimately crashing. I mean, we fell 40% in three weeks. That's a crash in financial markets. And for some strategists to come out and look for a 6% or a 10% decline over some intermittent period of time based on a broad slowing of data, or let's say earnings season, which we're coming up on, comes in a little below expectations, you know, that's all fine. That's just kind of the stuff that happens.

And Julie, I know that, you know, over time, this is kind of how things go, right? Everyone gets bulled up. Then, I mean, Tobias Levkovich this morning is out with his cautious comments. And so, I'll be interested to see if the market does indeed kind of respond to the data this way. But to be clear, no one thinks that the situation is bad for the country or bad for even corporate profits right now.

JULIE HYMAN: Right, and if Jamie Dimon is right and we potentially see a boom-- and he didn't use the word expansion or a recovery-- he used the word boom-- through 2023, one would have to think that, OK, even if stocks dipped from this peak in ISM, if it indeed is a peak in ISM, that then it'll go back up again. Or, you know, to put it in the way that Torsten put it in the last hour, that this could be an area at a time of turbulence for stocks. But that doesn't necessarily mean that a bull market is over, for example.

I mean, even if, as Binky points out in his notes, even if you see the S&P 500 down from a peak of 8.4%, even that is not a correction. So we'll see how this plays out over the longer term if the economy does keep expanding. Because, as we've talked about, the prediction is that it will keep expanding.

MYLES UDLAND: Yeah, and I look forward to our fourth quarter conversation when we say, oh, 5% growth next year? That's not going to be good enough. And then we can all go back and revisit how excited we were about 2% growth. Yeah, that's right. That's right, 2% growth back in 2017 or 2018.