By Nicole Goodkind, CNN Business
The bears and bulls are at it again.
Markets have seemingly recovered from a miserable mid-June slump that sent the S&P 500 down more than 20%, but analysts and investors can’t tell if the sky is clear or the eye of the storm is ahead.
Things are looking pretty good at the moment. The S&P 500’s return of 9.2% last month marked its best July since the Great Depression.
Fidelity Investments’ Jurrien Timmer recently noted that 88% of all stocks in the index are currently well above their 50-day moving average. “If this rally continues much further than it has so far, it will be difficult to conclude on a historical basis that this is not a new bull market,” he wrote.
Street bulls embrace Wolfspeed (stock up 32%), Cisco (nice bump)
Recession fears, 40 years of high inflation and the Fed’s historically aggressive rate hikes painted a rather bleak picture early in the summer and markets reacted accordingly. But with July’s strong jobs report and lower-than-expected inflation, there seems to be a growing belief that the worst may be behind us. Wall Street is greedy again.
“Strategists and economists should now have a healthy dose of humility. The market has priced in a recession, but all this economic news said not anytime soon. Maybe there’s potential for a soft landing,” said Keith Lerner, co-owner of Truist’s investments division. “Now the market appreciates with optimism that we can do it. She’s in party on mode.
Minutes from the July Federal Reserve meeting showed central bank officials believe a soft landing is within reach. However, the minutes also state that the impact of the policy tightening has not yet been fully felt.
In the last 50 years, only a bear market — which occurs when stocks close 20% or more from their last high — has not been accompanied by a recession. That was the stock market crash of 1987.
According to analysis by LPL Research, between WWII and this current downturn, there have been 17 bear markets (or near bear markets) in the S&P 500, declining an average of nearly 30% and lasting about a year. We’re nowhere near those numbers. There was no recession and it’s only been two months. Empirically, we should expect further losses.
Again, August tends to be a strange month for the markets. People are on vacation and low trading volume often leads to more volatility. September, on the other hand, is the weakest month of the year for the markets on average. This could simply be a bounce in a bear market. A little up before another fall.
“We view this as an extension of the bear market,” Bank of America analysts wrote on Tuesday, adding that they are quite common, averaging 1.5 times during bear markets.
As Morgan Stanley Wealth Management’s Lisa Shalett put it: “With the Fed Funds Rate rising another 75 basis points, prevailing inflation metrics and recession indicators flashing red, both stocks and bonds rallied on the prospect of a policy shift. . Mission accomplished? Not!”
Rate hikes won’t stop anytime soon
Fed officials say we still have a long way to go.
San Francisco Federal Reserve Chair Mary Daly told CNN’s Julia Chatterley on Thursday that raising interest rates by half or three-quarters of a percentage point in September was a “reasonable” way to reduce inflation.
The hikes would follow a subsequent 75 basis point rate hike by the Federal Reserve aimed at tackling late-breaking inflation, which remains near a 40-year high.
Last month’s CPI, a key indicator of inflation, showed that price growth had taken a bit of a breather. “There’s some relief and I’m really pleased, but I’m not counting on it,” Daly told CNN’s Julia Chatterley. “We have a lot of work to do at the Fed to return to price stability.”
Daly doesn’t see the Fed easing rate hikes anytime soon. He predicts they’ll last at least until 2023, but says that’s ultimately a good thing — even if Wall Street investors disagree.
“There is a lack of understanding in the markets, but consumers seem to understand,” she said. “They are counting on the Fed not to introduce unnecessary volatility. The worst thing you can have as a business or consumer is that interest rates rise quickly and then fall. … It just causes great caution and uncertainty.”
In her opinion, the Fed’s hike-and-hold strategy has historically paid off. The central bank is actively trying to warn against the idea of a “big bumpy rate path where we go up very quickly this year and then cut aggressively next year.”
Still, the US Federal Reserve has to walk a fine line between triggering a recession and raising interest rates, and fears of a sharp economic downturn have increased in recent months. Daly doesn’t see that.
“When we look at the data instead of the worst-case scenarios, I feel a great relief,” she said.
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