In the midst of this grand bearish trading year of 2022 to this point, we’ve begun to see what looks like real resistance to the downside in the markets. It’s too early to call the bottom of the overall curve, but a +900 jump in the Dow in just the past three sessions — including a -370-point drop on Friday — and similar trading graphs in all the major indices are putting “the bottom” back into conversation.
First we saw February lows followed by a bear-market rally, then an even more emphatic gouge over the summer, with mid-June lows set for a few months. But the last week of September — conveniently the end of calendar Q3 — saw new troughs in the Dow, S&P 500 and Nasdaq, with only a post-Q3 low put in on the tech-heavy Nasdaq.
Today, while closing off the highs for the day, we saw +553 points on the blue-chip Dow index, +2.68% on the wider-swath S&P 500, +354 points — +3.43% — on the Nasdaq today and +3.12% on the small-cap Russell 2000, all of which represent among the best trading days of the year. We now see the Dow reclaim 30K, the S&P above 3600 and the Nasdaq closer to 11K than 10K.
Curious, isn’t it, following a Consumer Price Index (CPI) report last week which was disheartening in its stubbornly high inflation metrics: while the Fed’s aggressive interest-rate hikes since March have now brought the Fed funds rate up 300 basis points (bps), we’re still seeing an 8-handle on headline CPI year over year. Even worse, we’re seeing “core” CPI — the stickier side of inflation — still going up.
However, as esteemed Wharton School Professor Jeremy Siegel pointed out this morning on CNBC, core CPI is historically among the last metrics to respond to anti-inflation measures. Headline CPI was down for the third-straight month last week, after all, demonstrating that the Fed’s higher interest rates are indeed having the desired effect, if not quite on the schedule most investors would like to see.
All this is to say market participants are again beginning to weigh the end of Fed tightening at some point in the foreseeable future. Another 75 bps hike on Nov. 2nd is now baked into the cake (largely thanks to still-high CPI numbers), which would bring the high end of the range to 4.00%. That’s right where the 10-year bond yield is (the inverted 2-year is closer to 4.5%), which from some measures means the Fed will have been “caught up.” And with one more Fed policy meeting December 14th, chances are currently much better that the end of 75 bps hikes are near at hand.
Q3 earnings season, into which we’re now heading the heavy reporting period, will likely have a say in how things go from here, as well. But even if earnings and sales growth are better than currently predicted (and quarterly results are generally better than expected, not worse), that’s not necessarily a recipe for continued draconian rate hikes. In fact, with employment levels remaining at admirable levels throughout what are overall historically recessionary conditions, what we may yet be experiencing is what a plurality of economists thought was a near-impossibility not long ago: the Fed actually threading the needle.
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Is the Fed Actually Threading the Needle?
In the midst of this grand bearish trading year of 2022 to this point, we’ve begun to see what looks like real resistance to the downside in the markets. It’s too early to call the bottom of the overall curve, but a +900 jump in the Dow in just the past three sessions — including a -370-point drop on Friday — and similar trading graphs in all the major indices are putting “the bottom” back into conversation.
First we saw February lows followed by a bear-market rally, then an even more emphatic gouge over the summer, with mid-June lows set for a few months. But the last week of September — conveniently the end of calendar Q3 — saw new troughs in the Dow, S&P 500 and Nasdaq, with only a post-Q3 low put in on the tech-heavy Nasdaq.
Today, while closing off the highs for the day, we saw +553 points on the blue-chip Dow index, +2.68% on the wider-swath S&P 500, +354 points — +3.43% — on the Nasdaq today and +3.12% on the small-cap Russell 2000, all of which represent among the best trading days of the year. We now see the Dow reclaim 30K, the S&P above 3600 and the Nasdaq closer to 11K than 10K.
Curious, isn’t it, following a Consumer Price Index (CPI) report last week which was disheartening in its stubbornly high inflation metrics: while the Fed’s aggressive interest-rate hikes since March have now brought the Fed funds rate up 300 basis points (bps), we’re still seeing an 8-handle on headline CPI year over year. Even worse, we’re seeing “core” CPI — the stickier side of inflation — still going up.
However, as esteemed Wharton School Professor Jeremy Siegel pointed out this morning on CNBC, core CPI is historically among the last metrics to respond to anti-inflation measures. Headline CPI was down for the third-straight month last week, after all, demonstrating that the Fed’s higher interest rates are indeed having the desired effect, if not quite on the schedule most investors would like to see.
All this is to say market participants are again beginning to weigh the end of Fed tightening at some point in the foreseeable future. Another 75 bps hike on Nov. 2nd is now baked into the cake (largely thanks to still-high CPI numbers), which would bring the high end of the range to 4.00%. That’s right where the 10-year bond yield is (the inverted 2-year is closer to 4.5%), which from some measures means the Fed will have been “caught up.” And with one more Fed policy meeting December 14th, chances are currently much better that the end of 75 bps hikes are near at hand.
Q3 earnings season, into which we’re now heading the heavy reporting period, will likely have a say in how things go from here, as well. But even if earnings and sales growth are better than currently predicted (and quarterly results are generally better than expected, not worse), that’s not necessarily a recipe for continued draconian rate hikes. In fact, with employment levels remaining at admirable levels throughout what are overall historically recessionary conditions, what we may yet be experiencing is what a plurality of economists thought was a near-impossibility not long ago: the Fed actually threading the needle.
Questions or comments about this article and/or its author? Click here>>