Wall Street says that bad news is no longer good news. Here’s why.

New York (CNN) There has been a seismic shift in investor perspective: Bad news is no longer good news.

For the past year, Wall Street has been hoping for cool monthly economic data that will encourage the Federal Reserve to pause its aggressive rate hikes to curb inflation.

But at its meeting in March – just days after a series of bank failures raised concerns about the stability of the economy – the central bank signaled that it plans to raise interest rates sometime this year. With an end to rate hikes in sight, investors have stopped trying to guess the Fed̵[ads1]7;s next move and have turned instead to the health of the economy.

This means, While softening economic data used to signal good news—that the Fed could potentially stop raising interest rates—now, cooling economic prints simply indicate that the economy is weakening. That has investors worried that the slowing economy could slip into a recession.

What happened last week? Markets wobbled after a series of economic reports signaled that the red-hot job market was finally cooling (more on that later), flashing warning signs across Wall Street.

Consequently, investors are ditching high-growth, large-cap stocks that have rallied recently to rush into defensive stocks in industries like health care and consumer staples.

While tech stocks rallied somewhat at the end of the short trading week — markets were closed for Good Friday — the Nasdaq Composite still fell 1.1%. The broad-based S&P 500 fell 0.1% and the Dow Jones Industrial Average rose 0.6%.

What does this mean for the 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 it will halt rate hikes this year, its actions so far have done so only slightly stabilized prices. The personal consumption expenditures price index, the Fed’s preferred gauge of inflation, rose 5% for the 12 months ended in February — well above the 2% inflation target.

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

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

Comments that are hawkish or reveal inflation concerns could hurt markets, he adds. “It keeps that boiling point and that temperature a little high.”

What comes next? The Fed will hold its next meeting in early May. Before that time, it will need to analyze several financial 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 of a point, according to to the CME FedWatch tool.

Is the labor market cooling down?

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

President Joe Biden said in a statement Friday that the March data is “a good jobs report for hardworking 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 fell to 3.5 percent, according to the Bureau of Labor Statistics. It is below expectations to hold steady at 3.6%.

The jobs report was also the first in 12 months to come in below expectations.

But that does not mean that the labor market is no longer strong.

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

Still, other data released last week help prove 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 U.S. job openings fell to the lowest level since May 2021. ADP’s private sector payrolls report fell far short of expectations.

What this means for the Fed is that the cooling in the latest jobs report is unlikely to be enough for the central bank to freeze interest rates at its next meeting.

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

Next

Monday: Wholesale inventory.

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. Revenue from Delta Air Lines (DAL).

Friday: Retail and the University of Michigan Consumer Sentiment Survey. Income from JPMorgan Chase (JPM), Wells Fargo (WFC), BlackRock (BLK), Citigroup (C) and PNC Financial Services (PNC).