Why Goldman Sachs Sees Good News Being Bad for Stocks

The growing connectivity of the Internet of Things (IoT) has allowed us to integrate more everyday devices and generally make life easier through the exchange of this information. Connecting the car to the IoT ecosystem is said to “redefine urban mobility,” says Stefan Burgstaller of Goldman Sachs Research.

This enhanced connectivity means vehicles will be able to share data in real time with each other, reducing gridlock and emissions. Some believe that the IoT will serve as the backbone for widespread autonomous vehicle deployment.

However, all this good news and development could be bad for stocks. Jason Cuttler, who manages the global tactical equity idea generation team in the Securities Division, examined the relationship between the S&P 500 and GS Research’s Surprise Index, which compares economic data releases with consensus expectations. He found that when the S&P 500 and the Surprise Index are positively correlated, in terms of daily returns, it means that U.S. markets are moving in the same direction as economic data. Although recently the day-to-day correlation is negative.

Cuttler commented:

Our hypothesis is that the market sees good economic news as raising the risk of a Fed hike or higher US bond yields. For many equity investors, that’s more bad than good.

At this point a softer economy, on the other hand, would imply a more dovish Fed, which could help support markets.

The SPDR S&P 500 ETF (NYSEMKT: SPY) was trading at $204.51 on Wednesday, with a 52-week trading range of $181.02 to $213.78.

The SPDR Dow Jones Industrial Average ETF (NYSEMKT: DIA) was trading at $175.74, within a 52-week range of $150.57 to $183.35.

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