NEW YORK (Reuters) — As investors await another giant rate hike from the Federal Reserve, they are taking the temperature of a week-long U.S. stock market rally that followed a brutal first-half selloff.
Even after Tuesday’s sharp fall, the S&P 500 remained up 7% from its June 16 low, buoyed in part by expectations that the Fed will pause its aggressive rate hikes early in the year. next year and a recent decline in commodity prices which investors hope will help dampen inflation .
So far, the rebound has its share of skeptics. Three rallies of comparable magnitude have already faded this year, with stocks each time sliding to new lows. Blackrock, the world’s largest asset manager, warned investors on Monday that greater volatility awaits and said it was underweight developed market stocks on expectations that inflation would remain stubborn.
“We think this is a bear market rally,” said Steve Chiavarone, senior portfolio manager at Federated Hermes, who thinks the Fed will remain hawkish for longer than expected and has reduced its equity exposure as that the S&P has risen over the past few weeks. .
Expectations that the Fed will end its market-killing rate hikes sooner than expected helped equities rise. Nearly two-thirds of investors now believe the fed funds rate will settle at 3.5% or lower by March 2023, up from just one-third a month ago with that view, according to CME.
Investors expect the Fed to tighten another 75 basis points on Wednesday, after already raising rates by 150 basis points so far this year. Hopes of moderation after that could be dashed if consumer prices remain stubbornly high in the coming weeks – repeating a scenario that has driven stocks lower this year, Blackrock strategists wrote.
“Inflation data could surprise on the upside – and cause markets to quickly reassess a higher rate path. Result: another equity selloff,” BlackRock strategists wrote.
Data from the Wells Fargo Investment Institute showed that the severity of the current bear market – which has seen the S&P 500 fall as much as 23.6% below its January high – may depend on whether the economy is in recession.
Bear markets accompanied by a recession lasted an average of 18 months, during which stocks fell an average of 35.8%. Without a recession, bear markets lasted an average of 5.9 months with an average decline of 27.9%, according to bank data.
On Sunday, US Treasury Secretary Janet Yellen acknowledged the risk of a recession, but said it was not inevitable. Still, parts of the market continued to reflect investor unease, even as the broader averages rebounded.
More stocks have posted new lows than new highs on the Nasdaq Composite Index for 76 straight days, the longest such stretch in 20 years, said Willie Delwiche, investment strategist at All Star Charts. The index is up nearly 9% from its June low.
“Until that relationship changes, it’s premature to say a bottom is in place,” Delwiche said.
More optimistic investors point to a series of signals that bearish sentiment may have reached a crescendo in recent weeks, potentially wearing down sellers and facilitating a rebound in stocks.
A survey of fund managers from BoFA Global Research last week showed expectations for global growth and earnings were at an all-time low and cash levels were at their highest in two decades, two contrarian indicators that bank strategists say could point to bigger equity gains ahead.
Short-term interest in the S&P 500, meanwhile, recently stood at its highest level since the depths of the coronavirus selloff in 2020, a signal that came during recent market lows, wrote the bank’s strategists.
“We think it’s possible the S&P 500 has already bottomed, and if it hasn’t, it will bottom in the third quarter,” said Lori Calvasina, head of equity strategy. U.S. stocks at RBC Capital Markets, in a note to investors.
Calvasina recently added equity exposure, betting that a possible recession has already been priced in.
Christopher Murphy, co-head of derivatives strategy at Susquehanna International Group, believes this week’s earnings reports – which include results from heavyweights such as Apple Inc and Meta Platforms – could play a key role in determine whether stocks can continue to rally.
For now, “the risks to the market are very well known right now” and are already being reflected in prices, he said.