Investors May Whistle Past Recession Graveyard With Stocks' Latest Rally

Investors feeling dizzy from last week’s sharp rally in stocks may want to listen to Tom Waits’ 1978 song, “Whistlin’ Past the Graveyard,” to sober up about the dangers that still lurk.

Stock gains catapulted the S&P 500

almost back to the 4,000 mark on Friday, also lifting it to its biggest weekly gain in roughly five months, according to Dow Jones market data.

Investors took heart on signs of slight slowdown in inflationbut the fortitude also comes as the bleaker backdrop for investors unfolds before everyone’s eyes. Mass layoffs at major tech companiesthe dramatic implosion of crypto exchange FTXand the daily pain of high inflation and skyrocketing business loans and households everyone takes sacrifices.

“We’re not convinced this is the start of a new bull market,” said Sam Stovall, chief investment strategist at CRFA Research. “We believe we are heading for a recession. This is not factored into earnings forecasts and therefore stock prices.

Stovall also said the stock market has yet to see “the traditional confidence capitulation shakeup that we typically see that marks the end of bear markets.”

By Meta Platforms Inc.

to Lyft Inc.

to Netflix Inc.

there is a wave of big tech companies are resorting to layoffs this fall, a threat that could sweep other sectors of the economy if a recession materializes.

However, information technology stocks in the S&P 500 jumped 10% for the week, while financials, which will benefit from higher interest rates, rose 5.7%, according to FactSet.

That may reflect optimism about the chances of a slower pace of Federal Reserve rate hikes in coming months, after sharp rate hikes helped undermine valuations and drag tech stocks down sharply over the past year. However, Loretta Mester, president of the Cleveland Fed, and other Fed officials after Thursday’s October inflation report reiterated the need to maintain high levels, while the 7.7% annual interest rate found a clearer path to the central bank’s 2% target.

The stock market rally may also suggest that investors consider the ongoing chaos in the crypto sector under control, despite Bitcoin

trading near its lowest level in two years and the shocking collapse in recent days of FTX, once the third largest cryptocurrency exchange in the world.

Read: FTX Crash: ‘This Is The Worst’ Moment For Crypto This Year Here’s what you need to know.

What happens to stocks in a recession

Blows to the US economy have rarely been good for stocks. A look at seven past recessions starting in 1969 shows that declines for the S&P 500 have been more typical than gains, with its most severe decline occurring during the 2007-2009 recession.

The S&P 500’s more than 37% decline from 2007 to 2009 was the worst recession since the late 1960s.

Refinitiv data, London Stock Exchange Group

Although a looming US recession is not a foregone conclusion, CEOs of America’s largest banks have been warning of the risks for months. Jamie Dimon of JP Morgan Chase said in October that a “severe recession” could drag the S&P 500 down another 20%, though he also said consumers are doing well so far.

Still, the steady stream of warnings about the chances of a recession has left many Americans confused and wondering if it could even happen without increasing job losses.

The big moves in stocks recently have also been hard to decode, given that the economy was shocked back to life in the pandemic by trillions of dollars in fiscal stimulus and easy money policies from the Fed, which are now being reversed.

“What I think goes unnoticed, certainly by the average person, is that these moves are not normal,” Thomas Martin, senior portfolio manager at Globalt Investments, said of the stock’s swings this week.

“It all depends on who’s positioned how — and for what — and how much leverage they’re using,” Martin told MarketWatch. “You get these big moves when people are ambushed.”

Here’s a look at the S&P 500’s sharp upward trajectory since 2010, but also its dramatic decline this year.

S&P 500 surge since 2010, but recent decline

Refinitiv Datastream

While Martin doesn’t rule out the potential for seasonal rally “Santa Claus”. at the end of the year, he worries about a potential decline in stocks next year, especially with the Fed likely to keep interest rates high.

“Certainly what’s being assessed now is either no recession or a very, very mild recession,” he said.

However, Christina Hooper, Invesco’s chief global market strategist, said the main story could be one of stocks sniffing the first steps on the road to an economic recovery, and the Fed potentially holding off on raising interest rates at a lower “end” interest than expected.

The Federal Reserve raised its benchmark interest rate to a range of 3.75% to 4% in Novemberthe highest in 15 years, but also signaled it could reach closer to 4.5% to 4.75%.

“If is often the case that you can see a stock do well in a not-so-good economic environment,” she said.

The S&P 500 rose 4.2% for the week, while the Dow Jones Industrial Average

rose 5.9 percent, marking its best weekly gain since late June, according to Dow Jones market data. The Nasdaq Composite shot up 8.1% for the week, its best weekly stretch in seven months.

In US economic data, investors will get an update on household debt on Tuesday, retail sales and homebuilders on Wednesday, followed by jobless claims and home starts on Thursday. Friday brings sales of existing homes.

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