Barron’s, which like MarketWatch is owned by Dow Jones & Company, caused some buzz on financial Twitter earlier this week when it published an article announcing that US stocks had bottomed out for the cycle. has been killed, even though there may be more unrest. months ahead.
The piece provoked some strong opinions on financial Twitter, as it was praised by bulls and condemned by bears, but the timing was right either way.
Just hours after the piece was published online, shares rose in the minutes of the Federal Reserve’s November policy meeting leading up to Thanksgiving, driven by speculation that senior Fed officials would favor smaller rate hikes in the future. appeared in
Some market strategists have spoken of the possibility of a “Santa Claus rally” for stocks at the end of the year. But in a recent piece, Mark Hulbert used some data to suggest that stocks’ potential gains over the next four weeks aren’t actually that significant based on history.
The past six weeks have been favorable for US equities. The S&P 500 SPX, -0.04% has been trading above its 200-day moving average for a few weeks. And as the large-cap index passed the 4,000 level, the CBOE volatility meter VIX, +0.84%, better known as the “Vix” or Wall Street’s “fear meter,” fell close to 20. That’s one of the lowest levels. This suggests that options traders expect volatility to subside in the coming month.
In addition, the Dow Jones Industrial Average DJIA, +0.32%, is poised to break out of bear market territory, up more than 19% from its late-September low.
Some analysts worry that these recent stock market successes may mean that US stocks have become overbought. Independent analyst Helen Meisler recently made the case for this in a piece she wrote for CMC Markets.
“I suspect the market is somewhat overbought in the medium term, but may be completely overbought by early December,” Meisler said. And she’s not alone in predicting that stocks will suffer another pullback soon.
Morgan Stanley’s Mike Wilson, who has become one of Wall Street’s most-followed analysts, said earlier this week after anticipating this year’s sell-off that he expects the S&P 500 to close next week. would drop below about 3,000 during the first quarter of the year, resulting in a “terrible” result. “Possibility to buy.
But with so much uncertainty looming over stocks, corporate earnings, the economy and inflation, among other things, here are some things investors will want to dissect before deciding whether an investable low in stocks has truly arrived.
Expectations around corporate earnings can hurt stocks
Earlier this month, equity strategists from Goldman Sachs Group GS, +0.51%, and Bank of America Merrill Lynch BAC, +0.23%, warned that they expect corporate earnings growth to stall next year. While analysts and companies have lowered their earnings expectations, many on Wall Street expect further cuts next year, as Wilson and others have said.
That could put more downward pressure on stocks as corporate earnings growth has slowed but is still limping so far this year, thanks in large part to rising profits from US oil and gas companies.
History tells us that stocks won’t fall until the Fed cuts rates
A remarkable chart created by Bank of America analysts has made the rounds several times this year. It shows how U.S. stocks haven’t fallen in the last 70 years since the Fed cut rates.
Typically, stocks start higher not long after the Fed makes at least some cuts, although in March 2020, the low of the COVID-19-induced selloff roughly coincided with the Fed’s decision to cut rates. eat. to zero and unleash a massive monetary stimulus.
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On the other hand, history is no guarantee of future performance, as market strategists like to say.
The Fed’s policy rate could rise more than investors expect
Fed Funds futures, which traders use to speculate on the path forward for Fed Funds rates, are currently seeing interest rates rise in the middle of next year, with the first cut coming in the fourth quarter, according to the CME’s FedWatch tool. is likely. ,
However, with inflation still well above the Fed’s 2% target, it is possible – perhaps even likely – that the central bank will have to keep interest rates higher for an extended period of time, driving stocks in Beam’s portfolio Capital will suffer even more pain. Manager Mohannad Ama said.
“Everyone is expecting a cut in the second half of 2023,” Aama told Marketwatch. “However, the ‘higher longer’ will turn out to be for the full 2023 period, which most people haven’t modeled,” he said.
Market strategists say prolonged high interest rates will be particularly bad news for growth stocks and the Nasdaq Composite Comp, +0.53%, which has outperformed in an era of floor rates.
But if inflation doesn’t ease quickly, the Fed may have little choice but to press ahead, as several senior Fed officials — including Chairman Jerome Powell — have said in their public comments. While markets saw slightly softer than expected inflation, Aama believes wage increases have not peaked yet, which could keep prices under pressure, among other things.
Earlier this month, a team of Bank of America analysts shared a model with clients that showed that inflation would not subside until 2024. According to the latest “dot plot” of Fed rate forecasts, senior Fed policymakers expect rates to peak next year. .
But the Fed’s own predictions rarely come true. This has been especially the case in recent years. For example, the Fed tried to raise interest rates in real terms the last time President Donald Trump attacked the central bank and rocked the repo market. Ultimately, the arrival of the COVID-19 pandemic prompted the central bank to return interest rates to the zero range.
The bond market is still signaling a recession ahead
Hopes that the US economy could avoid a severe recession certainly helped strengthen equities, market analysts said, but in the bond market, a sharply inverted Treasury yield curve sends the exact opposite signal.
On Friday, the 2-year TMUBMUSD02Y, which has a yield of 4.496%, was trading more than 75 basis points higher than the 10-year TMUBMUSD10Y, which traded at 3.713%, the most inverted level in more than 40 years.
Currently, both the 2s/10s yield curve and the 3m/10s yield curve are largely inverted. Inverted yield curves are considered reliable bearish indicators, with historical data showing that the 3m/10s inversion is even more effective at predicting bearishness than the 2s/10s inversion.
With a mixed message from the market, market strategists said investors should pay more attention to the bond market.
“It’s not a perfect indicator, but I believe in the bond market when the stock and bond markets diverge,” said Steve Sosnik, chief strategist at Interactive Brokers.
Ukraine remains a wild card
Certainly, it is possible that a quick resolution of the war in Ukraine could push global stocks higher as the conflict has disrupted the flow of vital commodities, including crude oil, natural gas and wheat, and caused losses worldwide. helps keep inflation in check.
But few have even imagined how continued success on the part of the Ukrainians could provoke an escalation by Russia, which could be very, very bad for markets, not to mention humanity. As Marko Papic of Clocktower Group put it: “I really think the biggest risk to the market is if Ukraine continues to tell the world what it is capable of. Further successes by Ukraine could prompt a response from Russia that is non-traditional. this would be the biggest risk [for U.S. stocks]said Papik in comments emailed to MarketWatch.