Traders are expecting good news from the Federal Open Market Committee meeting on Wednesday. Stocks rose in anticipation, but the Fed has already disappointed. Will they do it again?
Bulls put it this way: The economy is expected to weaken, at least moderately. However, third quarter Gross Domestic Product was slightly better than expected, rising 2.6 percent versus the 2.3 percent expected. Therefore, there is no real proof that bulls are completely honest.
As for slowing inflation, there is little evidence of it. The Personal Consumer Expenditure (PCE) Price Index is a measure of the prices Americans pay for goods and services and is closely monitored by the Fed. PCE for September came in at 0.5 percent, as expected. The University of Michigan’s Inflation Expectation Index also rose in October.
Bond yields continue to rise and are captured by every macroeconomic data point that is released. The dollar seems to be winning, at least in the short term. However, topping up may not mean down, but just a period of sideways movement.
Additionally, the above combination of macro fundamentals is supporting the stock. The market’s strength has been further enhanced by the earnings results of Google, Microsoft, Amazon and Meta. Together these stocks form a large weight in the overall market. Earnings results for these FANG stocks have been dire. Apple is the only positive, which analysts predicted results. However, even Apple has warned that the upcoming holiday season will not be a great one for the company.
A week ago, I explained to readers that this rally would be led by energy stocks, materials, precious metals, financials, services and healthcare. It will depend on the strength of those market segments to sustain (or rise) their markets. I also advised “don’t expect the markets to go straight up. Any economic data point will give traders an excuse to move the markets up or down, but overall, the trend should be your friend. ” This has been the essence of this bear market rally.
Most strategists had warned that this third straight earnings season would be a make-or-break event for the markets. I ignored such buzzkill predictions. As you know, I’m cynical about Wall Street’s quarterly earnings game. The way it works is that analysts cut their forecasts sharply ahead of earnings, which then allows companies to “beat” those forecasts. Typically, a “hit” will see a company’s stock price increase by a few percent or so.
The facts are that the company’s earnings, sales, and guidance, despite the supposed “hits,” are not surprising. More and more corporate executives are predicting a recession. Some have even abandoned guidance, claiming that the environment is so unpredictable that they cannot predict sales and profits with certainty.
However, that is not what drives the markets in my opinion. It’s the falling US dollar and the recent pullback in bond yields that has done yeoman’s work, along with what I call ‘hope’ that the Fed will be less hawkish.
In recent days, we have seen the dollar fall on the back of intervention. Japanese, Chinese and British treasuries are selling dollars. At the same time, fears of a recession have halted bond market yield increases, at least in the short term.
What hasn’t factored into the markets so far are the mid-term elections, which are right around the corner. In the past years, there have been many debates, positions and predictions about what will happen to the market and the economy, depending on which party has come out on top. I suspect that neither side, despite campaign promises, will have a significant impact on solving economic problems in the next two years.
I still think we continue higher with the S&P 500 Index reaching the 4,000-4,100 level in the coming days. Of course, all bets are off if the Fed gets even hawkier next week, but I’m betting they won’t.