VIDEO: Sustainable Rally or…Another False Hope?

Welcome to my latest video presentation. The article below is a condensed transcript; my video contains additional details and several charts.

We’re still in a bear market but market action last week suggested that we’re about to see the end of the bear, sooner than the pessimists are predicting.

This year, have we been faked out before? Of course. The consensus of Wall Street had been that the bear had bottomed in June. That was before we experienced a dreadful September.

However, the month of October has been a lot kinder to investors. And at the same time, there’s been increasing talk on Wall Street that, even though the Federal Reserve won’t pivot in the fourth quarter of 2022, it will at least use November’s 75 basis point interest rate hike as a staging area for reassessment and a “pause.”

Regardless, last week was greatly encouraging. For the week, the major equity indices jumped as follows: the Dow Jones Industrial Average +4.9%; the S&P 500 +4.7%; the NASDAQ +5.2%; and the EAFE +1.7%.

Despite the big cut in crude oil production by OPEC+, oil prices fell -0.5%, as the looming recession stoked concerns of energy demand destruction. This dynamic in the oil patch is a reminder that policymakers and oil ministers can only do so much to influence oil prices.

Global traders and the supply-and-demand equation are in the driver’s seat with oil, which is a reminder that blaming high gasoline prices on any particular political party is electoral demagoguery.

What will it take to sustain the stock market rally? The answer: lower inflation and concomitant easing by the Fed. We’re already seeing signs that the economy is slowing, which in turn will cool inflation.

Last week, we received housing sector data that revealed dramatic weakening. The adverse effects of rising interest rates have been the most sharply experienced in sectors of the market that are sensitive to rates, particularly housing, which is a bellwether for the overall economy.

As the Federal Reserve tightens, mortgage rates in the U.S. have climbed higher, with a 30-year mortgage now hovering over 7.0%.

The National Association of Home Builders/Wells Fargo Housing Market Index (HMI) dropped eight points to 38 in October, its 10th straight monthly decline. This reading is the lowest since August 2012, with the exception of the COVID breakout in the spring of 2020.

The NAHB/Wells Fargo HMI is based on a monthly survey of NAHB members, which asks respondents to rate current market conditions for the sale of new homes and in the next six months, as well as the traffic of prospective buyers of new homes. A reading above 50 indicates that more builders view conditions as good rather than poor. October’s reading is strongly indicative of a recession.

But on Wall Street, “bad” news often contains a silver lining. In the case of the latest NAHB index reading, this weakness in housing should soon manifest itself in lower shelter and rent cost components of the “core” consumer price index. These CPI components have been particularly hot (see my video for charts).

A bullish sign would be for U.S. Treasury yields to peak and stabilize. Lower yields tend to support stock and bond markets, particularly the higher-valuation and longer-duration segments of the market, because they reflect lower discount rates and cheaper cost of capital. Historically, in the 12 months following a peak in yields, bond market returns on average have been positive by about 16%.

On Monday, Wall Street extended last week’s rally and the major U.S. stock market indices closed higher, as follows:

  • DJIA: +1.34%
  • S&P 500: +1.19%
  • NASDAQ: +0.86%
  • Russell 2000: +0.35%

As Q3 earnings come pouring in, we face a big week for Big Tech, with expectations turning more optimistic for Silicon Valley stalwarts, despite rising interest rates.

The week ahead…

Keep a close eye on these scheduled economic reports: S&P Manufacturing and Services PMIs (Monday); S&P Case Shiller Home Price Index, consumer confidence (Tuesday); new home sales (Wednesday); initial jobless claims, durable goods orders (Thursday); personal consumption expenditures price index (PCE), consumer spending and sentiment, inflation expectations, and pending home sales (Friday).

The upshot: Stay patient. Barring a “black swan” in, say, Ukraine, the worst seems to be behind us.

In the meantime, you should know that I’m holding a special investment Town Hall on November 1. Be on the lookout for an invitation!

John Persinos is the editorial director of Investing Daily.

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