Equities are having an exceptional month of October.  Why the bear market rally may have more leeway.

Equities are having an exceptional month of October. Why the bear market rally may have more leeway.

An earlier version of this story misrepresented the date of the US midterm elections. They will take place on November 8 and not on November 9.

Despite a series of risky events facing investors over the next few weeks, some on Wall Street believe the latest bearish rally in stocks has more room to maneuver.

Although the S&P 500 SPX,
+1.38%,
Dow Jones DJIA Industrial Average,
+0.91%
and Nasdaq Composite COMP,
+16.45%
Remain mired in bear markets, stocks rebounded from “oversold” levels when major indexes fell to two-year lows. Bear markets are notorious for strong bounces, like the rebound that took the S&P 500 up more than 17% from its mid-June low before falling back to set a new 2022 low on Oct. 12.

That said, here are a few things investors should keep in mind.

Markets face many event risks

In addition to a deluge of corporate earnings this week, including some of the biggest megacap tech stocks like Microsoft Corp. MSFT,
+1.07%
and Amazom.com Inc. AMZN,
+0.46%,
investors will also receive reports of key economic data over the next two weeks, including a reading from the Fed’s favorite inflation gauge on Friday, and October jobs numbers, which are due out on 4 november.

Beyond that, there is also the next policy meeting of the Fed which will end on November 2. The Fed is widely expected to hike interest rates another 75 basis points, the fourth “giant” hike this year.

The US midterm elections, which will determine which party controls the US House and Senate, are due to take place on November 8.

Investors are still trying to analyze the Fed’s latest messaging change

Investors cheered what some market watchers described as a coordinated shift in Fed messaging last week, delivered via an Oct. 21 Wall Street Journal report that indicated the magnitude of a rate hike in the Fed in December would be up for debate, as well as commentary. San Francisco Fed President Mary Daly.

Still, the Fed is not expected to pivot anytime soon.

Because the fact remains: there is plenty of foam that needs to be squeezed out of the markets after nearly two years of extraordinary monetary and fiscal stimulus unleashed in the wake of the COVID-19 pandemic, according to Steve Sosnick, chief strategist at Interactive Brokers. .

“It’s easier to inflate a bubble than to burst it, and I don’t use the term ‘bubble’ facetiously,” he said in a phone interview with MarketWatch.

Richard Farr, chief market strategist at Merion Capital Group, played down the impact of the latest “coordinated” change in Fed guidance during an interview with MarketWatch, saying the impact on the final federal funds rate is relatively intangible.

Fed funds futures traders expect the upper end of the central bank’s main target rate to drop to 5% before the end of the first quarter of next year, and potentially stay there until the fourth quarter, although an early reduction would not be a complete surprise, according to the CME’s FedWatch tool.

Market technicians think stocks could rise a little

October is nothing like September so far, when stocks fell 9.3% to close the worst first nine months of a calendar year in two decades.

Instead, the S&P 500 has already risen more than 5.5% since the start of October despite briefly dropping to its lowest intraday low in more than two years after the index report was released. September consumer prices earlier this month.

Lily: Bear killers and crashes: What investors need to know about October’s complicated stock market story

Technical indicators suggest the S&P 500 may continue to build on last week’s gain, said Katie Stockton, market strategist at Fairlead Strategies, in a note she shared with clients and MarketWatch.

According to her, the next key level to watch on the S&P 500 lies north of 3,900, more than 100 points above the level where the index closed on Monday.

“Near-term momentum remains bullish amid the year-to-date downtrend. Support near 3,505 was a natural basis for a relief rally, and initial resistance is near 3,914,” she said.

A key bear sees a tradable opportunity

Mike Wilson, chief US equity strategist and chief investment officer of Morgan Stanley, has been one of Wall Street’s most vocal bears for more than a year now.

But in a note to clients earlier this week, he reiterated that stocks looked ripe for a rebound.

“Last week’s bullish tactical call raised client doubts, meaning there is still upside as we go from fire to ice – lower inflation expectations may lead to lower rates and higher stock prices in the absence of corporate capitulation on 2023 EPS guidance,” Wilson said.

This results season is off to a good start

At this point, it’s safe to say that the third-quarter earnings season has vanquished fears that Fed interest rate hikes and gnawing inflation have already significantly eroded profit margins, market strategists said. market.

According to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, the quality of reported earnings has already surpassed some of the early “whispered numbers” announced by traders and strategists.

In total, companies are reporting earnings 5.4% above expectations, according to Refinitiv data shared with media on Monday. This compares to a long-term average — since 1994 — of 4.1%.

However, when the energy sector is removed from the equation, expectations look much bleaker. The combined year-over-year earnings estimate for the third quarter is -3.6%, according to Refinitiv data.

While investors are still awaiting earnings from around three-quarters of S&P 500 companies, according to FactSet data, some – like Morgan Stanley’s Wilson – are already looking into next year as they expect the outlook earnings darken significantly, which could lead to an earnings recession – when corporate earnings decline for two consecutive quarters.

The outlook for the global economy remains bleak

Speaking of energy, crude oil prices send an ominous warning about expectations for the global economy.

“Much of the weakness in oil reflects expectations that the global economy will be in recession and close to recession,” said Steve Englander, global head of G-10 monetary strategy at Standard Chartered.

West Texas Intermediate CLZ22 Crude Oil Futures,
+0.77%
stabilized lower on Monday as lackluster import data from China and the end of the Communist Party leadership conference hinted at a slowdown in demand from the world’s second-largest oil consumer. Prices continued to fall early Tuesday.

Beware of “fighting the Fed”

Investors remain worried that “something else could snap” in the markets, as MarketWatch reported over the weekend.

It’s possible that such fears inspired the Fed’s apparent change in direction, Sosnick said. But the fact remains: Anyone buying stocks as the Fed aggressively tightens monetary policy must be prepared to tolerate losses, at least in the short term, he said.

“The simplest thing of all is, ‘Don’t fight the Fed.’ “If you’re trying to buy stocks now, what do you do? It doesn’t mean you can’t buy stocks overall. But it does mean you’re fighting an uphill battle,” he said.

The VIX signals that investors expect a wild ride

Even though stocks extended their October rally for another session on Monday, the Cboe VIX volatility index,
-4.39%
remained remarkably high, reflecting the idea that investors don’t expect the market’s rat race to end anytime soon.

Wall Street’s “fear gauge” ended Monday’s session up 0.5% at 29.85 and it was trading just below the 30 level early Tuesday.

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