Why the Dow finally bounced — and what it will take to convince investors it’s for real

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The pre-summer cheer finally made its way into the stock market a week before Memorial Day, but it will take more than the Dow Jones Industrial Average’s first winning week since late March to give investors confidence that The pain is in the past.

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What happened? Real, or inflation-adjusted, interest rates fell over the past week, corporate credit spreads — the yield premium on the U.S. Treasury demanded by investors to buy bonds issued by companies — tightened, and investors’ expectations for the future tightened. Expectations increased the Federal Reserve rate, said Mahmood Noorani, chief executive officer of research firm Quant Insight, in an interview (see chart below).

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quant insight

This gave some breathing room for the boom. Quant Insight’s model showed the S&P 500 had fallen below fair value, but is now in line with the metric.

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s&p 500 spx,
+2.47%
It avoided a close in bear-market territory on May 19 after hitting the session by more than 20% of its January 3 record close. It then rose 6.6% over the previous week, ending Friday, down 13.3% from its early January peak as it broke a streak of seven straight weekly declines.

Nasdaq Composite Comp,
+3.33%,
What remains solid in bear-market territory also broke a run of seven weekly declines, rising 6.8%. Dow’s DJIA,
+1.76%
The 18-week losing streak marked the end of weeks, coinciding with a rise of 6.8%, the longest since 1932.

Kevin Dempter, an analyst at Renaissance Macro Research, also pointed to some positive factors, including a significant decline in the US dollar, deeply oversold technical conditions and extremely bearish sentiment, while some stocks, such as Nvidia Corp. NVDA,
+5.38%,
Despite the bad news managed to reverse.

Opinion: S&P 500 may find a short-term bottom – but intermediate concerns remain

However, neither Noorani nor Dempter were ready to take a call on the market’s lower. And there was no shortage of expectations of an outright recession. Michael Bury, founder of Scion Asset Management, rose to fame after fearing the collapse of the US housing market, as described in Michael Lewis’s book “The Big Short”, in a since-deleted tweet about the 2008 market. There are parallels with the fall.

In a recent tweet on Friday, he explained the prospects for a consumer-led recession:

This echoes fears that were raised earlier in May as retailers target TGT,
+2.41%
and Walmart WMT,
+1.97%
Reported disappointing earnings, the stock-market sell-off deepened on worries that inflationary pressure was beginning to ease into corporate lows.

Noorani said a further fall in real yields could lead to further upside in stocks in the near future, but argued that it is unlikely that yields will peak.

After all, while the data, including Friday’s readings of the Fed’s preferred inflation indicator, the main personal consumption spending index, show that inflation is slowing, the task of bringing price pressure under control is far from over, he argued. Gave.

That leaves uncertainty about how high the federal funds rate, currently at 0.75% to 1%, will eventually go. The market cap pointed to a so-called terminal rate between 2.5% and 3%, but anything higher than it indicated would upset investors, he said.

The most important driver for yields “is going to be Fed policy,” he said, noting that central bankers have been “scared of inflation by historically high numbers.” Even if it is painful for the real economy, “they have to brake very hard and bring those numbers down.”

While the S&P 500 hasn’t technically confirmed that it’s in a bear market, many market watchers consider that only as a formality, noting that the stock will be selling for much of 2022. Behavior like a bear.

Dempter, in a Friday note, downgraded the consumer discretionary sector’s sharp performance to the rest of the market in the previous session, acknowledging that, historically, a sharp improvement in relative performance from about a month before the discretionary growth trough sees. He argued that the move was an oversold surge rather than a downtrend, arguing that Renmack would be more optimistic “if growth was weak, and inflation peaked.”

“History shows that both growth and inflation need to weaken further before they come down,” he said, noting that the energy sector’s continued outperformance of healthcare shows that inflation is still peaking.

Read more: This stock market indicator says investors don’t think inflation is peaking: Analyst

“We will be watching next week’s ISM” [manufacturing index] The numbers, a weak reading as the market-cycle could move the clock closer to a more favorable zone for the downside,” he said.

Credit: www.marketwatch.com /

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