It may be November, but Wall Street is already feeling the Christmas spirit. All three major indexes experienced their strongest weekly gains of the year, leaving investors to wonder if this rally is here to stay.
As of Friday’s close, the S&P 500 and the Nasdaq Composite saw their largest percentage increases in nearly a year, climbing 5.85% and 6.61% respectively, since November 11, 2022. The Dow Jones Industrial Average also had an impressive jump of 5.07%, marking its best performance since October 28, 2022.
These substantial gains are a reflection of the market’s optimism, particularly fueled by a Goldilocks jobs report. The report showed strength without being overwhelmingly robust, strengthening the belief that the economy will avoid a recession and that the Federal Reserve’s interest rate hikes may be coming to an end.
After a challenging few months, this news was a sigh of relief. However, it may be premature to assume that the upward trend will last.
As has often been the case recently, the Federal Reserve poses a potential problem. The central bank’s rate increases have led to higher bond yields, which have proven to be a hindrance for stocks. While a cut in interest rates would be welcome news for investors, it would be concerning if implemented due to an economic slowdown.
David Rosenberg, founder of Rosenberg Research, highlights the connection between bonds and stocks, stating, “Bonds are leading stocks. Stocks desperately need lower yields, but not because of a recession. The hope for a ‘soft landing’ is still factored into overall risk-assets.”
While the Fed’s signal that rate hikes are nearing an end may bring some relief, it can be a double-edged sword if economic data suggests a weakening economy. Many third-quarter earnings reports indicate such a trend.
Founder of Sevens Report, Tom Essaye, warns about the implications of falling rates in relation to economic data. He says, “If economic data is starting to worsen, then it’s possible that we are entering a precarious period performance-wise – the most ‘dangerous’ time of the year.”
In summary, Wall Street has embraced the holiday spirit with impressive gains. However, caution remains due to the ever-present influence of the Federal Reserve and the potential impact of economic indicators. The market’s future trajectory will depend on finding the delicate balance between interest rates and sustainable economic growth.
The Market’s Search for What’s Next
In a recent analysis, Essaye suggests that the market is currently focused on finding “what’s next” rather than responding to new and sustainable information. The question that arises is whether the next major catalyst will drive the market in a bullish or bearish direction.
The Bearish Perspective
Will Denyer from Gavekal Research takes a bearish stance, recommending investors to exit the equity market while they still can. Denyer notes that various leading indicators, such as financial conditions and certain labor market indicators, continue to suggest an impending recession. However, due to the time lag between policy actions and their impact on the real economy, the timing of the recession remains uncertain.
A Glimmer of Hope
On the other hand, Ed Yardeni, President of Yardeni Research, offers a more optimistic outlook. He believes that recent data indicate the possibility of a soft landing scenario: employers are still hiring, wage inflation is moderating, and productivity is increasing. Yardeni is confident that the stock market correction has concluded and predicts that the S&P 500 will reach 4600 by the end of the year.
Returning to Complacency
Despite their differing views, both Rosenberg and Yardeni agree on one aspect—the market has swiftly regained its bullish narrative. Rosenberg cautions that the stock market has become complacent again, citing the significant decline in the Cboe Volatility Index (VIX), which is the largest drop since December 2021.
The future remains uncertain, and only time will reveal what lies ahead.