A version of this story first appeared in CNN Business’ Before the Bell newsletter. Not a subscriber? You can sign up right here. You can listen to an audio version of the newsletter by clicking the same link.

New York
CNN
 — 

There’s been a seismic shift in investor perspective: Bad news is no longer good news.

For the past year, Wall Street has hoped for cool monthly economic data that would encourage the Federal Reserve to halt its aggressive pace of interest rate hikes to tame inflation.

But at its March meeting — just days after a series of bank failures raised concerns about the economy’s stability — the central bank signaled that it plans to pause raising rates sometime this year. With an end to interest rate hikes in sight, investors have stopped attempting to guess the Fed’s next move and have turned instead to the health of the economy.

This means that, whereas softening economic data used to signal good news — that the Fed could potentially stop raising rates — now, cooling economic prints simply suggest the economy is weakening. That makes investors worried that the slowing economy could fall into a recession.

What happened last week? Markets teetered after a slew of economic reports signaled that the red-hot labor market is finally cooling (more on that later), flashing warning signals across Wall Street.

Investors accordingly shed high-growth, large-cap stocks that have surged recently to rush into defensive stocks in industries like health care and consumer staples.

While tech stocks recovered somewhat by the end of the short trading week — markets were closed in observance of Good Friday — the Nasdaq Composite still slid 1.1%. The broad-based S&P 500 fell 0.1% and the blue-chip Dow Jones Industrial Average gained 0.6%.

What does this mean for markets? Now that Wall Street is in “bad news is bad news and good news is good news” mode, it will be looking for signs that the economy remains resilient.

What hasn’t changed is that investors still want to see cooling inflation data. While the central bank has signaled that it will pause hiking rates this year, its actions so far have only somewhat stabilized prices. The Personal Consumption Expenditures price index, the Fed’s preferred inflation gauge, rose 5% for the 12 months ended in February — far above its 2% inflation target.

Moreover, Wall Street might be overly optimistic about how the Fed will act going forward: Some investors expect the central bank to cut rates several times this year, even though the central bank indicated last month that it does not intend to lower rates in 2023.

It’s unclear how markets will react if the Fed doesn’t cut rates this year. But there likely won’t be a notable rally unless the central bank pivots or at least indicates that it plans to soon, said George Cipolloni, portfolio manager at Penn Mutual Asset Management.

Commentary that’s hawkish or reveals inflation worries could hurt markets, he adds. “It keeps that boiling point and that temperature a little high.”

What comes next? The Fed holds its next meeting in early May. Before then, it will have to parse through several economic reports to get a sense of how the economy is doing, and what it will be able to handle. Markets currently expect the Fed to raise interest rates by a quarter point, according to the CME FedWatch tool.

The labor market appears to be cooling somewhat, at least according to the slew of data released last week. But it’s still far too early to assume that the job market has lost its strength.

President Joe Biden said in a statement Friday that the March data is “a good jobs report for hard-working Americans.”

The March jobs report revealed that US employers added a lower-than-expected 236,000 jobs last month. Economists expected a net gain of 239,000 jobs for the month, according to Refinitiv.

The unemployment rate dropped to 3.5%, according to the Bureau of Labor Statistics. That’s below expectations of holding steady at 3.6%.

The jobs report was also the first one in 12 months that came in below expectations.

But that doesn’t mean that the job market isn’t strong anymore.

“The labor market is showing signs of cooling off, but it remains very tight,” Bank of America researchers wrote in a note Friday.

Still, other data released last week help make the case that cracks are finally starting to form in the labor market. The Job Openings and Labor Turnover Survey for February revealed last week that the number of available jobs in the United States tumbled to its lowest level since May 2021. ADP’s private-sector payroll report fell far short of expectations.

What this means for the Fed is that the cooldown in the latest jobs report likely won’t be enough for the central bank to pause rates at its next meeting.

“The Fed will more than likely raise rates in May as the labor market continues to defy the cumulative effects of the rate hikes that began over a year ago,” said Quincy Krosby, chief global strategist at LPL Financial.

Monday: Wholesale inventories.

Tuesday: NFIB Small Business Optimism Index. Earnings from CarMax (KMX), Albertsons (ACI) and First Republic Bank (FRC).

Wednesday: Consumer Price Index and FOMC meeting minutes.

Thursday: OPEC monthly report and Producer Price Index. Earnings from Delta Air Lines (DAL).

Friday: Retail sales and University of Michigan consumer sentiment survey. Earnings from JPMorgan Chase (JPM), Wells Fargo (WFC), BlackRock (BLK), Citigroup (C) and PNC Financial Services (PNC).