The Craze Over Economic Data That Stock-Market Investors Used to Ignore is Causing Them to Freak Out

Investors have grown increasingly anxious about economic data as the Federal Reserve continues its efforts to cut interest rates and guide the economy toward a soft landing. While major data like monthly employment numbers have always carried significance, now even seemingly routine economic reports can cause significant market reactions.

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This heightened sensitivity stems from both the rapid pace of news updates and how easily investors can act on new information, according to Jack Janasiewicz, a portfolio manager at Natixis Investment Managers Solutions. He explains that the instant accessibility of news, combined with the ability to trade swiftly, contributes to the outsized market reactions that have become more common.

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Bespoke Investment Group examined 25 years of data to investigate this growing trend. Their findings reveal that volatility on Wall Street has increased over the past four years, particularly on days when economic data is released.

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Before the pandemic, the S&P 500 index typically moved an average of 0.81% up or down on days when economic reports were issued. However, since the onset of the COVID-19 pandemic in March 2020, that average has risen to 0.94%, according to Bespoke’s analysis. This reflects the heightened importance that investors now place on economic releases.

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Interestingly, the research also revealed that economic indicators that once drew little attention have now taken on greater significance. For example, data like ISM manufacturing reports, which were once more impactful, have seen a decline in relevance since the pandemic. However, 10 economic indicators have been linked to 1% market moves on the day they are released. These include reports on consumer confidence from the University of Michigan, personal income and spending data, ADP private payroll numbers, and durable-goods orders in manufacturing, among others.

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Prior to the pandemic, no single economic indicator consistently triggered a 1% move in the S&P 500 on the day of its release, Bespoke noted.

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One of the newly important datasets is the Labor Department’s job openings and labor turnover survey, commonly known as JOLTS. Jeffrey Roach, the chief economist at LPL Financial, pointed out that JOLTS was largely ignored by investors before the recent tightening cycle. However, as Federal Reserve Chair Jerome Powell began focusing on the ratio of job openings to unemployed individuals as a key measure of labor market tightness, this once-overlooked report has become a focal point for market watchers. Roach explained that this ratio, which reflects the strength of the labor market, is now highly scrutinized, a stark contrast to a decade ago when traders largely disregarded the JOLTS data.

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Market volatility has also followed surprises in inflation data in recent years. This is logical given that the Fed was forced to raise interest rates aggressively in 2022 to counter the sharp rise in inflation, which persisted longer than expected. As a result, the days when the Fed makes decisions on interest rates, known as "Fed-decision days," have become especially volatile.

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Bespoke’s analysis shows that daily moves on Fed-decision days averaged 0.88% before the pandemic, but have increased to 1.17% since March 2020, as the central bank has taken more aggressive action under Powell’s leadership.

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Janasiewicz from Natixis believes that financial leverage could be a contributing factor to these larger market swings. He specifically mentions the growing popularity of options that expire at the end of the day and single-name exchange-traded funds (ETFs) as potential drivers of volatility. Additionally, the S&P 500’s recent push to record highs, coupled with a 20% rise in 2023, may be further amplifying the market’s sensitivity to economic news, especially as concerns about a potential recession resurface.

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There has also been renewed discussion of inflation fears following the Fed's recent 50-basis-point rate cut, the first in four years. As inflation remains a critical factor influencing Fed policy, even modest economic updates can significantly impact investor sentiment.

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Janasiewicz remains optimistic about the strength of consumers, believing that a recession is unlikely in the near future. He also sees further potential for stocks to rise. However, he acknowledged that investors are on high alert, watching for any signs of weakness in the economy that could prompt a sharp selloff in the stock market. He emphasized that many investors are wary of being the last to exit the market in case of a downturn, leading to quick reactions to any negative news.

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This sensitivity to economic data was evident on Thursday when the S&P 500 and Dow Jones Industrial Average both jumped following the release of multiple economic reports. These included a strong 3% growth in gross domestic product (GDP) for the second quarter, as well as continued reluctance among employers to make significant hiring or firing decisions. The Nasdaq Composite Index also climbed 1% on the same day, according to TradeAlgo, highlighting how the market continues to respond swiftly to economic news.

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In summary, as the Federal Reserve continues its efforts to manage inflation and interest rates, investors remain highly attuned to economic data. This increased focus, combined with the ability to react instantly, has led to greater volatility in the financial markets, even on days when seemingly routine economic updates are released.

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