Bad news is good news for the stock market as investors look for an end to the highest inflation in 40 years, Fundstrat says

• Bad economic news is likely good news for the stock market as investors seek an end to 40-year highs in inflation, according to Fundstrat.
• A recent uptick in layoffs, combined with fewer job postings on Indeed.com suggest wage inflation could be cooling.
• If inflation cools, that would give the Federal Reserve some breathing room as it raises interest rates.

The stock market is set up to view bad economic news as good news as investors seek an end to 40-year highs in inflation, according to a Monday note from Fundstrat's Tom Lee.

High inflation readings have forced the Federal Reserve to get aggressive in tightening financial conditions by raising interest rates and reducing its $9 trillion balance sheet. But much of the inflation in everything from oil to eggs is being driven by supply-side disruptions that are not influenced by the Fed's monetary actions.

If inflation begins to cool, it would give the Fed more breathing room in its current tightening cycle, which could lead to a sizable rally in risk assets like stocks, according to Lee.

"Incoming data could show labor market weakening ... and thus [the] job market could be cooling at a pace faster than implied by tighter financial conditions," he said.

One key driver of overall inflation is wage inflation, and a cooling labor market should help limit rising wages, and thus other inflationary pressures. While JOLTS data shows that there are about 1.9 job openings for every unemployed American, that data is on a six-week delay.

More up-to-date job data readings shows a significant cool down in new job postings on Indeed.com, combined with a surge in layoffs at startup companies over the past month. The ongoing decline in new job postings for the healthcare, retail, and leisure sectors will likely show up in the next release of JOLTS data, giving investors confidence that a less strong labor market will help limit wage inflation.

The slowdown in job postings according to Indeed.com data comes as Google data shows travel searches moving considerably lower over the past month, according to the note. "This 'revenge travel' dynamic might be coming up against tougher comps. And this could slow the need for hiring," Lee explained.

Finally, layoffs have been ticking up to the highest level since May 2020 at startup firms as the cost of capital rises significantly, according to data from Layoffs.fyi.

"Layoffs are accelerating, hitting 7,700 so far in May... we expect this to soon go parabolic, based upon anecdotal comments we have heard," Lee said.

With alternative, up-to-date data showing a swift slowdown in the labor market, that could help subdue wage inflation and lead to an overall cooldown in the high inflation readings investors have gotten used to over the past few months. And that might spark a relief rally in stocks that have gotten hammered on concerns of rising interest rates and high inflation.

Lee said he leans bullish on stocks into the second half of 2022 after what has been a treacherous start to the year for investors.