Bad news became bad news early this month. Maybe you noticed.

In a world where equities are just as often priced off expectations for monetary policy as they are corporate fundamentals, there’s a “bad news is good news” zone vis-à-vis the macro and it’s pretty wide. As long as the incoming data isn’t indicative of a recession, softer data’s ok and in many cases it’s actually preferable to the extent it’s conducive to dovish policy outcomes. Another way of thinking about it goes like this: Multiple expansion’s easy, earnings growth’s hard.

But there’s a threshold beyond which bad macro news is just bad, the idea being that in the presence of an outright recession, rate cuts may be small comfort for equities given the read-through of a serious downturn for sales and corporate profits. We breached that threshold on August 1 (when an underwhelming ISM manufacturing update came packaged with a very poor read on the underlying employment gauge) and on August 2 (when the Sahm rule triggered).

One of the best ways to visualize “good news” / “bad news” regime shifts is to chart the stock-bond return correlation or the equities-yield correlation.

The simple figure above from Morgan Stanley’s Mike Wilson on Monday illustrates this month’s regime shift.

Suddenly, stocks and yields moved in lockstep which, as Wilson’s chart header notes, is a clear indication that “good is good” and, by extension, “bad is bad.”

“The rally off the August 5 lows has coincided with better-than-expected economic data,” he wrote, citing the decent ISM services read, a 23,000 two-week drop in initial claims and the big retail sales beat last week. “The bond yield versus equity return correlation has continued higher as stocks have rallied and rates have come off the lows.”

You can see the same dynamic in 2024 Fed-cut pricing, by the way. Note the difference between equities’ response to rate-cut wagers in November/December 2023 versus early this month in the figure below.

Equity prices moved in lockstep with Fed easing expectations late last year, but managed to decouple in 2024 as the AI mania easily overwhelmed scaled-back expectations for Fed cuts in the eyes of stocks. Early this month, equities dropped sharply alongside an abrupt repricing in the market-implied Fed trajectory, then recovered smartly as better data allayed recession fears, forcing a rethink of aggressive rate-cut bets.

“These developments support the idea that risk assets should continue to trade with the high frequency growth data in the near-term,” Wilson wrote Monday, adding that if “the growth data continue to improve, the market can stay above the upper-end of the fair value range” which, according to Morgan Stanley, is around 5400 SPX.

But this is Mike Wilson we’re talking about. You’re not going to get an unequivocally bullish assessment from Mike. “While the positive surprises… have garnered the most attention over the last two weeks, the data have not been uniformly better-than-expected,” he went on, noting that the Bloomberg US Economic Surprise index hasn’t improved. “The true test for the market,” he said, will be the next jobs report.