Investors feeling giddy about last week’s sharp rally in stocks might want to listen to Tom Waits’ song, “Whistlin’ Past the Graveyard” from 1978, to realize the dangers that still lie ahead.
A surge in stocks led the S&P 500 index SPX,
almost back to the 4,000 mark on Friday, also raised to the biggest weekly gain in roughly five months, according to Dow Jones Market Data.
Investors show courage in the sign of a little slowing of inflationBut fortitude also comes as a drearier backdrop for investors already unfolding in plain sight. Massive layoffs at large technology companiesdramatic implosion of crypto-exchange FTXand the day-to-day pain of high inflation and skyrocketing loans on businesses and household everything takes a toll.
“We don’t believe this is the start of a new bull market,” said Sam Stovall, chief investment strategist at CRFA Research. “We believe we are heading into a recession. That has not been factored into earnings estimates and, therefore, stock prices.
Stovall also said that the stock market hasn’t seen “the traditional shakeout of confidence capitulation that we usually see that marks the end of a bear market.”
From Meta Platforms Inc. META,
to Lyft Inc. LYFT,
to Netflix Inc. NFLX,
there is wave of major technology companies with layoffs this fall, a threat that could sweep other economic sectors if a recession materializes and drags down the stocks of large companies in the Technology Nasdaq Composite Index QQQ,
Yet, information technology stocks in the S&P 500 jumped 10% for the week, while financials, which stand to benefit from higher interest rates, rose 5.7%, according to FactSet.
That can reflect optimism about the odds of a slower pace of interest rate hikes by the Federal Reserve in the next month, after a sharp rise in the rate helped to damage valuations and pull tech stocks down dramatically in the past year. However, since the October inflation reading on Thursday, Loretta Mester, president of the Cleveland Fed, and other Fed officials have reiterated the need. to maintain a high level, up to 7.7% annual rate found a clear path to our central bank’s 2% target.
The stock market rally can also indicate that investors see continued turmoil in crypto as contained, even though bitcoin BTCUSD,
trading near its lowest level in two years and a shocking collapse in recent days FTX, once the third-largest cryptocurrency exchange in the world.
What happens to stocks in recessions
Blows to the American economy have rarely been good for stocks. A look at the past seven recessions, starting in 1969, shows declines for the S&P 500 as more typical than gains, with the most violent drop occurring in the 2007-2009 recession.
While the looming US recession is not a foregone conclusion, the CEOs of America’s largest banks have been warning about the risks for months. Jamie Dimon JP Morgan Chase said in October that “recession is tough” could drag the S&P 500 down another 20%, though he also said consumers are doing well, for now.
Still, a steady stream of warnings about the odds of a recession has left many Americans confused and wondering if anything could happen without it increased job loss.
Big moves in stocks lately are also hard to code, given the economy’s shock resurgence in the pandemic with trillions of dollars of fiscal stimulus and the Fed’s now-reversed easy money policy.
“What I think is overlooked, certainly by the average person, is that this movement is not normal,” Thomas Martin, senior portfolio manager at Globalt Investments, said of this week’s swing in stocks.
“It’s all about who is positioned how — and for what — and how much leverage they use,” Martin told MarketWatch. “You get these incredible moves when people are offside.”
Here’s a look at the S&P 500’s sharp upward trajectory since 2010, but also its dramatic decline this year.
While Martin did not rule out the potential for seasonal rally “Santa Claus”. heading into the end of the year, he worries about the potential lower leg for stocks next year, especially with the Fed likely to keep interest rates high.
“It’s certainly worth it now that there’s no recession or a very mild recession,” he said.
However, Kristina Hooper, Invesco’s chief global market strategist, said the overarching story could be one of the stocks sniffing out the first step on the path to economic recovery, and the Fed potentially stopping its rate increase below the “terminal” rate than expected.
The Fed increased its benchmark interest rate to a range of 3.75% to 4% in Novemberthe highest in 15 years, but it has also been signaled that it can go up from close to 4.5% to 4.75%.
“It often happens that you can see stocks doing well, in a less-than-good economic environment,” he said.
The S&P 500 rose 4.2% for the week, while the Dow Jones Industrial Average DJIA,
gained 5.9%, posting its best weekly gain since late June, according to Dow Jones Market Data. The Nasdaq Composite Index rose 8.1% for the week, its best weekly stretch in seven months.
In US economic data, investors will get updates on household debt on Tuesday, retail sales and home builder data on Wednesday, followed by jobless claims and housing data starting Thursday. Friday brings home sales.