Bill SchmickiBerkshires columnist
This week, investors once again believe the Federal Reserve will soon exit its hawkish rate hikes. This is the same old song of misplaced optimism that has fueled the past few bear market rallyes. Enjoy this while it lasts.
Last week, I advised investors to let the S&P 500 index drop to the 3,550 level and then rise. “I will use that behavior to buy stocks, and if they continue to rise, I will buy more,” I said.
Only 20 points difference (last Friday the S&P 500 hit 3,570). Equities surged on Monday, recording a spectacular ‘V’ shaped bounce with all indices up nearly 6%. As I noted in my last column, “The bear market rally that has occurred several times this year can be powerful. It may be time.
Market rally is another spin on Fed easing. This time around, the trader is betting that the US job market is starting to weaken, with August job openings showing him down more than a million jobs. Friday’s jobs data dampened some of that euphoria.
Non-farm payrolls data increased by 263,000 in September 2022, slightly higher than the expected 255,000 jobs, and the unemployment rate fell to 3.5% compared to the expected 3.7%. Average hourly wages rose 0.3%, in line with expectations. Although the results were not statistically significant, it gave traders an excuse to profit from the week’s healthy rally.
Another key barometer, the Institute for Supply Management (ISM) manufacturing survey, fell to a 28-month low in September as high interest rates and inflation dampened growth. Bad economic news for markets is good news for stocks.
The race to raise rates by central banks around the world (including the US) is considered overkill. Global growth is declining much faster than anyone expected, and if true, the Fed will turn around sooner than expected.
Bulls have already pointed to an interest rate shock in the UK, which will force the Bank of England to help the market, cause problems at major European bank Credit Suisse and plague European regulators. I am letting you. In Australia, the central bank’s interest rate hike was less than expected.
All of this created a ‘buying loop’ where bad economic data was letting the bulls know that the Terminal Fed funds rate (4.25% to 4.50%) was as high as interest rates. The bears covered the selling, driving the dollar lower, bond yields falling from stable and stocks higher. I think this story could push the market up to his mid-November. But don’t expect the market to move in a straight line. Each economic data point (such as the job report) gives traders an excuse to move the market up or down, but overall, trends are on your side. A drop is a buying opportunity.
I advocate for countries benefiting from a weaker dollar and lower bond yields to outperform in this kind of environment, with a focus on precious metals, particularly silver. Technology, communications services, consumer goods, finance, utilities, and Kathy Wood stocks fill my list.
Last week, silver jumped 8% before profit-taking began. Oil wasn’t far behind either. Make no mistake, though, this is just another bear market rally. The Federal Reserve continues to warn the market that their buying loop is a hoax. “Don’t mistake market volatility for market instability,” said one Fed chief. The market will continue to ignore them.
Sadly, at some point, investors will find that bad economic news and slowing growth are really bad news for the stock market. The buying loop then turns into a doom loop, which takes weeks.
In the meantime, we expect the stock to recover about half of last week’s gains. I expect the S&P 500 index to return to around 3,650 to 3,675 (give or take) before rising again midweek.
Bill Schmick is a founding partner of Onota Partners, Inc. in Berkshire. His predictions and opinions are purely his own and do not necessarily represent the views of Onota Partners (OPI). None of his commentary is investment advice. Please contact Bill directly at 1-413-347-2401 or email bill@schmicsretiredinvestor.com.
Those seeking individualized investment advice should contact a qualified investment advisor. None of the information contained in this article is intended or should be construed as an endorsement of OPI, Inc. or a solicitation to become a client of OPI. Readers should not assume that the strategies or particular investments discussed are taken, purchased, sold or held by his OPI. Investments in securities are not insured, protected or guaranteed and may result in loss of income and/or principal. This communication may contain opinions and forward-looking statements, and there is no assurance that such beliefs or expectations will prove correct. Investments in securities are not insured, protected or guaranteed and may result in loss of income and/or principal. This communication may contain opinions and forward-looking statements, and there is no assurance that such beliefs or expectations will prove correct.
