CNBC Daily Open: A good economy doesn’t mean positive markets

CNBC Daily Open: A good economy doesn’t mean positive markets

This report is from today's CNBC Daily Open, our new, international markets newsletter. CNBC Daily Open brings investors up to speed on everything they need to know, no matter where they are. Like what you see? You can subscribe here.

What you need to know today

Moderating jobs growthU.S. nonfarm payrolls grew by 187,000 in July. That's less than the Dow Jones estimate of 200,000 but is slightly more than June's downwardly revised jobs growth of 185,000. Unemployment dipped ten basis points to 3.5%, the lowest level since late 1969. All in all, it was a pretty good report for both workers and the Federal Reserve.

Bad week for U.S. stocks

Major U.S. indexes ended Friday in the red, giving the S&P 500 and Nasdaq Composite their worst week since March. Wall Street's bad showing dragged down Asia-Pacific markets Monday. China's Shanghai Composite fell 0.75% as traders braced for the country's trade data coming tomorrow, and inflation figures on Wednesday. Japan's Nikkei 225 squeezed out a 0.08% increase.

Rising oil pricesOil prices hit a four-month high Monday. October Brent futures traded around $86.13 per barrel and September U.S. West Texas Intermediate futures were around $82.70 per barrel, both the highest since mid-April. Prices were pumped up by an attack on a Russian oil export hub and Saudi Arabia's extension of its oil production cut.

Australia wants China to remove all trade barriers between both countries, the country's Trade Minister Don Farrell told CNBC on Monday. Farrell's comments come after Beijing lifted its tariff on Australian barley imports effective Aug. 5. The move highlights how bilateral tensions have thawed since the leaders of both countries met at the G-20 summit in Bali last November.

[PRO] Upsides amid a China downgradeMorgan Stanley downgraded the MSCI China, an index that represents a range of mainland Chinese large- and mid-cap stocks. The bank's still cautious of growth prospects in the country despite the promise of more state support. Nonetheless, the bank added two stocks to its focus list, suggesting there are still pockets of optimism to be found in individual companies.

The bottom line

The U.S. economy's had an unbroken string of victories.Job growth in July was lower than expected, which is what the Federal Reserve wants to see to get inflation down. But it wasn't so low that it'd spell trouble for workers or the economy.

"Overall, this is still not the picture of the labor market we would expect to see if the economy were in danger of decelerating dramatically in the short term, although without question there are signs of moderation," said Rick Rieder, chief investment officer of global fixed income at asset management giant BlackRock.

Indeed, the U.S. economy looks so healthy — a slowing but strong labor market, lower inflation readings and stronger-than-expected growth — that Wall Street's changing its mind about recession. JPMorgan's the latest bank to abandon its recession forecast. The country's biggest bank follows Bank of America, which called for a "soft landing, no recession," and Goldman Sachs, which lowered its probability of a recession from 25% to 20%.

Yet markets slumped Friday. The S&P 500 fell 0.53% and the Nasdaq Composite slipped 0.35%. That's the fourth straight loss for both indexes. The Dow Jones Industrial Average dipped 0.36%. Moreover, all indexes ended the week in the red. The S&P and Nasdaq slid around 2.3% and 2.9% respectively, their worst week since March. The Dow retreated 1.1%.The disparity between the good economic news and the bad week in markets reminds us that, as much as there's a close relation between the two, they aren't the same.

Economic data measures and reports what has already happened. Whereas markets are alive, fueled by feelings and comprise bets on the future. What does this tell us? That traders aren't sure if the S&P can continue rallying — even if inflation data coming out this week is softer than expected. As Steve Sosnick, chief strategist at Interactive Brokers, put it, "The risk mentality is changing a bit."

In the fast-moving world of finance, the correlation between a nation's economic health and its financial markets can sometimes be deceptive. While a robust economy often indicates positive market performance, it is essential to understand that the two areas are not always mutually dependent. CNBC Daily Open delves into the intricacies of this relationship and reveals why a good economy doesn't always guarantee positive markets.

Economics versus the stock market

Understanding the difference between the economy and the stock market is essential. The economy refers to the overall health of a country, including factors such as employment rates, GDP growth, inflation and consumer spending. On the other hand, the stock market represents the collective value of shares of publicly traded companies, often seen as a reflection of investor sentiment and confidence.

Psychological factor

Investors' perceptions and emotions play a significant role in the movement of stock markets. Even in a booming economy, investors can exhibit fear and uncertainty, leading to market swings. Sentiments such as geopolitical tensions, trade wars or the global health crisis can quickly change market trends, regardless of the broader economic environment.

Corporate profits and market performance

Corporate profits are a major determinant of market behavior. While a strong economy can create a favorable business environment, it does not guarantee that all companies will perform equally well. Inconsistencies in earnings reports can lead to mixed investor reactions and cause market volatility.

Interest rates and inflation

Central banks often adjust interest rates to control inflation and stabilize the economy. While low interest rates are generally beneficial for stimulating borrowing and spending, they can also affect investors seeking higher returns. In times of low interest rates, investors may flock to riskier assets, leading to higher stock prices. Conversely, rising inflation can lead to reduced purchasing power and negatively affect consumer spending, even in the midst of a booming economy.

External factors and global markets

In today's interconnected world, external factors can have a profound impact on domestic markets. International trade relations, geopolitical events and global economic trends can spill over into local markets and cause disruption regardless of the national economic situation.

Market speculation

Speculation is an integral part of financial markets. Investors often anticipate future economic developments and their impact on specific sectors or industries, leading to stock price fluctuations. Such speculation can lead to market movements that do not necessarily coincide with current economic reality.

The relationship between a good economy and positive markets is more complex than it seems. While a robust economy provides a favorable backdrop for market growth, it does not guarantee a smooth ride for investors. Market movements are influenced by psychological factors, company performance, interest rates, external influences and market speculation.

As investors and market participants, it is essential to remain vigilant, conduct thorough research and diversify portfolios in order to successfully navigate the complexities of the financial environment. CNBC Daily Open provides readers with valuable insights, making informed decisions and adapting to ever-changing market conditions. Remember, the path to financial success lies in understanding that a strong economy does not always equate to positive markets.