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The Trend Continues: Good Economic News Is Bad News For Stocks

We are in a very confusing investing climate. A strange pattern has emerged over the past few months, which is that good economic news is actually bad for the stock market. This trend repeated itself on March 6 when the government reported a stronger-than-expected monthly jobs report, and stocks sold off. The Labor Department said 295,000 jobs were created in February, and the unemployment rate fell to 5.5%. You’d think this would be good news for stocks, since more people employed means more money in consumers’ pockets, which should help the economy. And yet, the Dow immediately sank 150 points on the news.

The reason for this is that the market is now anticipating when interest rates will rise. The Federal Reserve will now have more confidence in raising rates sooner rather than later, because the economy is doing strong enough to stand on its own two legs. However, higher interest rates are a negative for many stock sectors, including utilities, telecommunications, and virtually all dividend-paying stocks. Electric utility Southern Company (SO) real estate investment trust Realty Income (O), and telecom giant AT&T (T) were two of the hardest-hit stocks. Higher interest rates will bring higher yields, which results in lower prices, since price and yield are inversely related. In addition, for companies that maintain debt-heavy capital structures, higher interest rates mean a higher cost of capital.