First-time investors often have trouble grasping a very special concept when it comes to financial markets. Sometimes, good news is really good news in the sense that it drives the market higher. But sometimes good news is bad news, because it causes a bearish reaction. This is why the narrative is vital to understanding the market and its likely future reactions.

Let's take the example of the sequence we've seen on stock market indices since January 2022. In the first half of the year, rapid rate hikes to combat inflation rekindled fears of a global recession. As a result, equities, particularly capital-intensive stocks (led by technology, zombie and real estate), suffered particularly badly. Then came a narrative shift. At the end of the day, the worse the economic news, the faster the Fed would return to accommodating, or in other words, pivot, as it has done every time since 2009. This is where the bad news turned out to be good news, and then came the "real" good news from companies. With fears of recession receding, the stock market could resume its upward march, and October marked the (temporary?) end of hostilities. Yes, but not the whole stock market, just the large/mid-caps. The result was a two-speed market, as we have often described, with a few stocks pushing up the main benchmarks while the rest of the market continued to languish.

All was well until this summer, which marked a new turning point with the latest Fed statement. It's worth noting that the market peaked the day after the US Federal Reserve decided to raise its key interest rates by 25 basis points. And this is where it gets tragi-comical. Why is the stock market falling when most economists now believe that the upward cycle is over? To quote Bernard Maris: "The economist is the one who is always able to explain a posteriori why he was, once again, wrong". More subtly, I invite you to look at the market's reaction to earnings releases, the day after central banks release economic figures, to try and understand the pillars of the current narrative. Did we think recession had been averted? If so, how can we explain the rise in long rates when short rates are now treading water? On the contrary, this behavior reflects fears that a recession is still likely, but simply postponed until late 2023/early 2024. We'll be keeping a close eye on the next set of economic data. If they come in slightly weaker than expected, this will take some of the pressure off the Fed, which will not be tempted to raise rates to cool the economy. If, on the other hand, they are significantly weaker than expected, increasing the risk of recession, this should weigh on the stock market. Finally, if they come in well above expectations, proving that economic dynamism is still at work, further rate hikes may be necessary.