Why the horrid April jobs report was actually great news for stocks

• The April jobs report badly missed estimates on Friday, but the stock market promptly hit record highs anyway.
• That's because the market is now in a phase where bad economic news is good news for equities.
• The biggest fear for investors is an inflation spike that prompts the Federal Reserve to tightening monetary policy sooner than expected. The weak jobs report soothed those worries.
• Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

Bad economic news is now good news for the stock market, as Friday's horrid April jobs report translated into record highs for the S&P 500 and a spike in tech shares.

April saw an addition of 266,000 jobs, well below the estimated forecast of 1 million. Unemployment rose to 6.1% from 6.0%, bucking expectations for a decline. It was the worst miss since 1998.

But instead of an instant drop in stocks following the April jobs report, the tech-heavy Nasdaq 100 soared more than 1%. And while the more economically sensitive Dow Jones industrial average initially sold off, it quickly reversed into positive territory.

The centerpiece of this apparent disconnect is inflation, which is the biggest risk facing stocks right now, according to a recent Bank of America survey. The worry is that significant rise in inflation will prompt the Federal Reserve to tighten its easy monetary policy, which has long driven bullish sentiment in stocks.

But the significant labor-market weakness indicated by the April jobs report has investors shrugging off inflationary concerns for now. In fact, investors seem to have been emboldened to pile further into tech stocks, which carry the highest and most daunting valuations in the market.

This same dynamic was on full display earlier this week - albeit in inverse fashion - after Janet Yellen's comments about interest rates needing to eventually rise caused a similarly sharp sell-off in tech stocks.

Going forward, now that the economy doesn't appear as red-hot as many have thought, inflation expectations decline further. That could, in turn, give the Fed more breathing room to continue its monthly bond purchases of $120 billion and keep interest rates near 0%.

April's jobs report gives credence to Fed Chairman Jerome Powell's committment to not even talk about talking about tapering its monthly bond purchases or raising interest rates. Instead, Powell would like to see a string of reports that solidify the idea that inflation is consistently running above its average target of 2% and the economy is near full employment.

Read more: 'If lumber crashes, stocks might be next': An award-winning portfolio manager who's tracked lumber prices for years breaks down why futures hitting a record high of $1,600 is an ominous sign - and shares what investors can do ahead of the eventual crash

There are varying explanations for why more Americans are not rushing back into the job market. The president of the US Chamber of Commerce called for the end of the $300 supplemental unemployment insurance on Friday, arguing that government stimulus programs have disincentivized employees to return to work.

But Fundstrat's Tom Lee thinks instead, Americans are afraid to get back to work given that the COVID-19 pandemic has yet to be eradicated.

"Many people are still unwilling to 'risk their lives' to get a job given COVID-19 fears," Lee said on Friday.

Whatever it may be, if the weak jobs reports continue, it could result in a jump in wage inflation as businesses are forced to pay top-dollar for workers.

But for now, as evidenced by Friday's move in the stock market, bad news is good news.