To The Moon

Last week’s U.S. non-farm payroll report once again pointed toward an economic slowdown, reinforcing the belief that the Federal Reserve could soon pivot toward interest rate cuts. In today’s strange market psychology, weak economic data no longer just waves a caution flag, it can also light a rallying torch. We’re back in the familiar “bad news is good news” phase, where soft numbers spark optimism that monetary policy will loosen.

S&P 500 (.SPX)

This dynamic isn’t new. We’ve seen this kind of “bad news is good news” market psychology before. A clear example was during 2020 and 2021, when pandemic lockdowns triggered sharp economic slowdowns. Instead of collapsing, equity markets surged as the Federal Reserve slashed interest rates to near zero, launched large-scale asset purchases, and governments rolled out massive fiscal stimulus. The weak data acted as a trigger for unprecedented support measures, which in turn fueled one of the fastest stock market recoveries in history even while the underlying economy was still struggling. But history also reminds us that this optimism can fade quickly if the underlying economic weakness proves deeper or longer-lasting than expected.

Last week’s sentiment shift was sharp. Tech giants and chipmakers led a strong rebound, while the volatility index (VIX), which had spiked nearly 20% on Friday, pulled back sharply on Monday. The sudden move from fear to risk-on enthusiasm reflects just how quickly investor mood can change.

Cboe Volatility Index (VIX)

But here’s the balancing act: Fed cuts might boost valuations in the short run, yet if earnings weaken due to slower consumer demand or higher corporate costs, the market’s foundation could still be shaky. A rally built purely on rate-cut hopes, without solid profit growth behind it, risks being a short-lived sugar high.

That’s where risk management comes in. Hedging, whether through diversification, options strategies, or inverse ETFs is like carrying an umbrella on a cloudy day: we might not need it, but we’ll be glad it’s there when the skies turn. Still, over-hedging can be just as harmful as no hedging at all, draining returns and causing us to miss out on meaningful upside. Like seasoning in cooking, moderation is essential.

It’s also worth remembering that the market doesn’t operate in a vacuum. Global events from energy price shocks to geopolitical tensions can shift sentiment in a heartbeat.

In short, while “bad news” may be fueling “good news” rallies for now, the prudent approach is to stay prepared. Hedge sensibly, avoid complacency, and remember — in markets, tides can turn faster than we think.