For the everyday individual, news of a struggling employment market and declining consumer expenditures is reason for concern. Fewer jobs on offer, decreased hiring, and constrained family budgets generally spell trouble for the average American. But on Wall Street, the very same news can create optimism—and push stock prices higher.

It is counterintuitive. Why should investors be cheering on proof of a slowing economy? The answer lies in the nuanced and often ironic interplay between economic reality and Federal Reserve policy.

The Spending Slowdown Is Real

New consumer statistics reveal that spending—once the primary engine of the U.S. economy—is starting to sputter. Retail sales have missed projections in a number of sectors, including discretionary items such as electronics and home furnishings. Credit card debt has exploded, and delinquencies are inching upward. Inflation-adjusted spending is flat or declining in most sectors.

This isn’t a blip. It is a sign of an increasingly cautious population. As stimulus savings evaporate and interest rates remain high, Americans are tightening their belts.

Trouble in the Job Market

The labor market, once incredibly snug, is also starting to unravel. Job listings are falling, hiring freezes are deepening across the board, and layoffs are no longer the sole dominion of tech giants. The unemployment rate is still historically low, but that oversimplifies some key subtleties. Labor force participation is stagnant, and wage growth is decelerating—both signs the white-hot job market of 2021–2022 is losing its glow.

Again, to most individuals, this is bad news. Income and employment are the bedrock of financial well-being. But for investors, particularly those interested in interest rates and monetary policy, this moderation is good news.

The Fed Effect

Why does Wall Street cheer bad economic news? The answer is buried in the Federal Reserve’s twin mandate: price stability and full employment. The Fed has obsessed about inflation for the past two years. To fight it, they raised interest rates at the fastest pace in four decades. That, in turn, raised the cost of borrowing—for consumers, for companies, and even governments.

And now, with economic weakness looming, investors are betting that the Fed will halt or even reverse those rate hikes. And when interest rates decline, asset prices climb.

Lower interest rates mean lower loans, juicier corporate earnings, and—most pertinent to markets—more appealing valuations on stocks. Growth stocks, in particular, are extremely sensitive to interest rate expectations, which is why tech-heavy indexes often rocket on bad economic news.

Risky Optimism?

Investors may be having a ball today, but the situation is dicey. Bets on rate cuts because the economy is decelerating are as good as cheering for a fire because you believe the firemen will arrive any moment. If the slowdown turns into a full-fledged recession, corporate earnings would implode—and that’s not good news for the stock market, no matter what the Fed does.

Furthermore, inflation is also a wild card. If growth decelerates but prices remain sticky—a phenomenon referred to as stagflation—the Fed is caught in the middle. In such a scenario, they cannot lower interest rates without risking unleashing another inflationary spike, and the markets could become unstable very quickly.

The Bottom Line

The Wall Street-Main Street disconnect is not new, but it is especially acute today. Economic indicators are flashing yellow—some of them red—and yet equity markets are still rising on hopes for looser monetary policy.

Investors must tread cautiously. Rate cuts may provide the economy with a temporary boost, but they’re often responding to real pain in the economy. For long-term prosperity, a sound economy is far more enduring than a rally based on superficial data.

However, for now, the markets are doing what they do best—looking ahead, factoring in future expectations, and performing the Federal Reserve’s next move.