By Pete Biebel, Senior Vice President
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Almost everyone knows that line from the old Beach Boys song about a young lady tearing around town in her daddy’s T-Bird. Even non-surfer dudes and dudettes will now have that ditty looping in their heads for hours. I chose that line because I think it’s an apt metaphor for our markets on two different levels. On a longer-term macro level, it’s a reminder of how our economy and financial markets were like totally amped, dude, for most of the past 10 to 12 years thanks largely to the Fed’s low interest rates and liquidity injections. Stocks ripped higher on that tsunami of free money. We had fun, fun, fun ‘til the Fed took the punchbowl away.
On a shorter-term basis, the markets have been having fun, fun, fun for the past two weeks, rallying off the mid-October low. Recall that things were getting pretty gnarly early in the month. The S&P 500 Index (SPX) was cascading lower in the surfing equivalent of a ragdoll wipeout. Short-term technical metrics were oversold, and investor sentiment was more negative than a beach bum’s work ethic. The CPI news on the morning of Oct. 13 caused a wash-out, gap-down opening that dropped SPX to below 3500, its lowest level in nearly two years. That’s when the fun started.
The averages all quickly reversed that morning and rallied from big opening losses to big net gains for the day. From that morning’s low, and over the past twelve trading sessions, SPX has ripped higher by nearly 12%, including nearly a 4% gain last week. The Dow Jones Industrial Average (DJIA) has been the big kahuna, rallying nearly 6% last week and about 14% from its October low. So far, it’s the average’s best monthly performance in nearly 47 years and its best October ever. Last week’s big gain reduced DJIA’s net loss for the year to less than 10%. The NASDAQ Composite Index (COMP) missed the big wave. Due largely to negative reactions to earnings announcement from several of COMP’s largest component companies, the index gained a relatively paltry 2.24% for the week. Still, COMP ended Friday about 10% above its October low.
Among the factors that added to the swell of bullishness was the increasing belief that the Fed’s wave of rate increases would be slowing in the coming months. The markets expect the Committee to announce a fourth consecutive 75-basis point increase on Wednesday, but, where another 75-basis point hike in December had been the prevailing expectation, the markets now indicate that there’s a slightly better chance of just a 50-basis point bump. Any sign of slowing in the Fed’s pace of hiking will be taken as a sign that an eventual pivot is that much closer. The stock market has shown a consistent history of appreciating in the months following the Fed’s last rate hike in a cycle.
A crush of quarterly earnings reports last week also added some buoyancy to the market. As is typical, reported earnings so far this quarter have been slightly better than expected. The most notable exceptions have been in several of the mega-cap tech stocks. The stocks of Amazon.com and Meta Platforms had a couple spectacular double-digit wipeouts following their earnings announcements. Overall, earnings for the S&P 500 appear to be coming in with year-over-year growth of a bit more than 2%; that would be the lowest annual increase in two years.
The extremely bearish sentiment and technical factors early in the month were warning flags that the stock market was overdue for at least a temporary relief rally. Now, after two weeks of fun, fun, fun, it’s time to question how much more fun is to be had. The recent action is reminiscent of the rally from the market’s low in mid-June to the rebound high in mid-August. Back then, SPX recovered a little more than half of its loss for the year, gaining about 18% from its low. COMP climbed 24% during that stretch, compelling some commentators to declare that a new bull market had arrived. Unfortunately, that was just before the indices were about to roll over and sink to new lows. Steep rebound rallies in bear markets are fun, fun, fun while they last.
We were reminded then that some of the steepest market rallies come as rebounds in continuing bear markets. Whether the current rally is just another temporary bounce, or the early stage of a new bull market will be revealed in the weeks ahead. SPX has already recovered about half of the loss from the mid-August high to the mid-October low. Some additional gains seem likely, especially given the market’s tendency to rally late in the year. SPX ended last week just above 3900. Climbing into the 4000 – 4025 range seems like a reasonable near-term goal. If the rally can continue beyond about 4150, that would be a strong argument that a new bull market has begun.
Due to the steepness of the recent rally, there is no nearby downside level that would signal trouble. Falling quickly back below 3800 would be unsettling but not alarming. However, if the decline continued to below 3700, the indices would likely be headed to lower lows.
This week brings the beginning of November and a seasonally strong period for stocks. The midterm elections are a week from tomorrow, and stocks have a history of rallying following the midterms. So, based on seasonality alone, there should be every reason to expect the market’s short-term uptrend to last for several more weeks. We’ll get another full slate of earnings announcements this week, and while we’re likely to see some big reactions in individual stocks, they’re not likely to have a material impact on the overall market. The most potentially impactful of the economic reports will be later in the week with the Initial Claims report on Thursday and the Non-Farm Payrolls and Unemployment Rate numbers reported Friday morning.
The volatility spotlight will be focused on Wednesday afternoon. The Fed’s rate hike announcement then will, in itself, probably be a nonevent. The critical information will be revealed in the policy statement and the subsequent press conference. Any indication that the pace of rate hikes will be pared back will likely spark a bullish celebration. Conversely, if the language suggests continuing hawkishness, then things could get gnarly.
| Date | Report | Previous | Consensus |
| Monday 10/31/2022 | Chicago PMI, October | 45.7 | 47.3 |
| Dallas Fed Manufacturing Survey, October | -17.2 | -18.0 | |
| Tuesday 11/1/2022 | PMI Manufacturing Final, October | 49.9 | |
| ISM Manufacturing Index, October | 50.9 | 50.0 | |
| Construction Spending, September, M/M | -0.7% | -0.5% | |
| JOLTS Job Openings, September | 10.053mm | 9.875mm | |
| Wednesday 11/2/2022 | ADP Employment Report, October, M/M | +208K | +200K |
| FOMC Policy Announcement and Press Conference | |||
| Thursday 11/3/2022 | International Trade, Trade Deficit, September | $67.4B | $71.1B |
| PMI Composite, October | – | 46.6 | |
| ISM Services Index, October | 56.7 | 55.4 | |
| Initial Jobless Claims | 217K | 222K | |
| Continuing Claims | 1,438K | 1,450K | |
| Factory Orders, September, M/M | 0.0% | +0.3% | |
| Friday 11/4/2022 | Non-Farm Payrolls, September, M/M | +263K | +210K |
| Unemployment Rate | 3.5% | 3.6% |
Links to previously published commentaries can be found at benjaminfedwards.com/Latest Investment Insights/Weekly Market Commentary/Market