The bad economic news so far has been mostly positive for the stock market, as investors worry that the Federal Reserve will start cutting interest rates. There is a danger, though, of overdoing it, where too much bad news can signal a significant downturn and even a recession ahead. The dilemma of the market finds itself in the approaching week of critical data, usually focused on the all-important US labor market, which in turn gives a signal about the health of consumers. “Bad news has been good news for equities for the past two months … but if growth picks up significantly, bad news could become bad news,” Ohsung Kwon, equity and quantitative strategist at Bank of America, said in a client note. Monday. Kwon points out that during that period, the S&P 500 and the US dollar have diverged almost perfectly. The dollar index has fallen steadily albeit gradually, while the large-cap equity index has remained steady despite a gradual rise. That trend became acute over the past month, which saw the S&P 500 rise about 3%. The greenback often rises on bad news as investors seek the safety of cash and equities, while the stock market receives good news. .SPX .DXY line 2024-04-01 Stocks vs. dollar At the same time, economic data generally broke, or at least did not meet Wall Street forecasts. Citi’s Economic Shock Index, which measures actual data against consensus expectations, started to decline in mid-April, turning negative in late May when it fell by around 120%. A countercyclical measure shows that expectations exceed reality. Generally, bad economic news can help convince the Fed that the time is right to lower interest rates. The only exception is higher inflation, which would push the Fed toward tighter monetary policy. The central bank has kept its benchmark lending rate in the range of 5.25%-5.5% from July 2023, the highest level in 23 years. Fears about a more hawkish Fed on inflation have caused much volatility in the stock market. That brings the market to open this week the data, which includes surveys on job vacancies and private job creation, concluding there with the Bureau of Labor Statistics’ nonfarm payrolls report. Economists polled by Dow Jones expect growth of 178,000 jobs for the month, which would match April’s 175,000, and likely hold the unemployment rate at 3.9%. If the estimate is correct, it will make employment in the “Goldilocks range” from 125,000 to 175,000 neither too hot nor too cold, according to Bank of America experts. However, anything below 125,000 could mean a reversal of the bad news trend, where a rising unemployment rate could trigger a measure known as the Sahm Rule, the bank said. Designed by economist Claudia Sahm at New Century Advisors, the rule states that if the three-month average unemployment rate is half a percentage point higher than the 12-month rate, the economy is in the early stages of a recession. In May, the 12-month low will be 3.5%, which means the unemployment rate will have to continue at a three-month average of 4% to meet Sahm’s hurdle. Based on the previous two months, the unemployment rate would have to rise to 4.3% in May for that to happen. However, Bank of America sees that as unlikely, expecting consensus job growth above 200,000. “As long as inflation remains in check, stronger growth should also be positive for stocks,” Kwon wrote. Still, BofA’s strategy team expects market volatility on the report and believes the market is underpricing the possibility of a market move. The company recommends an options strategy known as a “straddle” as a way to maximize potential market swings. The move consists of buying a put and a call on S&P 500 options that expire on the same day and have the same strike price. Pays when the index rises or falls from the strike price by more than the premium paid. BofA said the trade ended in the money six to eight weeks ago.