Stock market rally amid FTX blast and Facebook-parent layoffs, says investors could whistle past recession graveyard

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By Joy Wiltermuth and Frances Yue

“We’re not convinced this is the start of a new bull market,” says Sam Stovall, chief investment strategist at CRFA

Investors stunned by last week’s strong rally in stocks may want to listen to Tom Waits’ song, 1978’s “Whistlin’ Past the Graveyard,” to sober up the dangers that still lurk.

The surge in stocks propelled the S&P 500 (SPY) index nearly to the 4,000 mark on Friday, also taking it to the biggest weekly gain in about five months, according to Dow Jones Market Data.

Investors showed courage in the face of signs of a slight slowdown in inflation, but the courage also comes as a dimmer backdrop for investors unfolds in plain sight. Massive layoffs at big tech companies, the dramatic implosion of crypto-exchange FTX, and the daily pain of high inflation and skyrocketing corporate and household borrowing are taking their toll.

“We’re not convinced this is the start of a new bull market,” said Sam Stovall, chief investment strategist at CRFA Research. “We believe we are heading into a recession. This has not been factored into earnings estimates and, therefore, share prices.”

Stovall also said the stock market has yet to see “the traditional capitulation in confidence that we typically see that marks the end of bear markets.”

From Meta Platforms Inc. (META) to Lyft Inc. (LYFT) to Netflix Inc. (NFLX), there’s a wave of big tech companies resorting to layoffs this fall, a threat that could sweep other sectors of the economy should a recession materialize. and lower stocks of large companies in the tech-heavy Nasdaq Composite Index (QQQ).

Still, S&P 500 information technology stocks jumped 10% for the week, while financials, which should benefit from higher interest rates, rose 5.7%, according to FactSet.

This could reflect optimism about the chances of a slower pace of interest rate hikes by the Federal Reserve in the coming months, after sharp rate hikes helped to undermine valuations and drag down significantly tech stocks over the past year. However, since Thursday’s October inflation reading, Cleveland Fed Chair Loretta Mester and other Fed officials have reiterated the need to keep rates high, until the annual rate of 7.7% finds a clearer path to the central bank’s 2% target.

The stock market rally could also suggest that investors consider the ongoing crypto chaos contained, despite bitcoin trading near a two-year low and the shocking collapse in recent days of FTX, once the third largest. cryptocurrency exchange in the world.

Read: FTX fall: ‘It’s the worst’ time for crypto this year. Here’s what you need to know.

What Happens to Stocks in a Recession

Blows to the US economy have rarely been good for stocks. A look at seven past recessions, starting in 1969, shows that S&P 500 declines are more typical than gains, with its steepest decline occurring in the 2007-09 recession.

While a looming recession in the United States is not a foregone conclusion, the CEOs of the largest American banks have been warning of the risks for months. JP Morgan Chase’s Jamie Dimon said in October that a “tough recession” could send the S&P 500 down another 20%, although he also said consumers were doing well for the time being.

Still, the steady stream of warnings about the likelihood of a recession has left many Americans confused and wondering if it can even happen without an increase in job losses.

The recent big moves in equities have also been difficult to decipher, given that the economy has been shocked by the pandemic by trillions of dollars in fiscal stimulus and easy money policies from the Fed that are now being reversed.

“What I think goes unnoticed, certainly for the average person, is that these moves are not normal,” said Thomas Martin, senior portfolio manager at Globalt Investments, of stock moves this week. .

“It’s about who is positioned, how — and for what — and how much leverage they use,” Martin told MarketWatch. “You get these outsized moves when people are offside.”

Here’s a look at the S&P 500’s strong upward trajectory since 2010, but also its dramatic fall this year.

While Martin isn’t ruling out the possibility of a seasonal “Santa Claus” rally towards the end of the year, he is concerned about a potential decline in equities next year, especially with the Fed likely to maintain high interest rates.

“Certainly what’s being assessed right now is either no recession or a very, very mild recession,” he said.

However, Kristina Hooper, Invesco’s chief global market strategist, said the overall story could be one of stocks sniffing the early stages of a path to economic recovery, and the Fed potentially halting its rate hikes. rate at a lower “terminal” rate than expected.

The Fed raised its benchmark interest rate to a range of 3.75% to 4% in November, the highest in 15 years, but also signaled that it could reach nearly 4.5% to 4, 75%.

“While it often happens that you can see stocks performing well, in a less than good economic environment,” she said.

The S&P 500 rose 4.2% on the week, while the Dow Jones Industrial Average gained 5.9%, posting its best weekly gain since late June, according to Dow Jones Market Data. The Nasdaq Composite Index jumped 8.1% for the week, its best weekly streak in seven months.

In U.S. economic data, investors will receive an update on household debt on Tuesday, retail sales and homebuilder data on Wednesday, followed by data on jobless claims and housing starts. Thursday. Friday brings existing home sales.

-Joy Wiltermuth

 

(END) Dow Jones Newswire

11-12-22 1312ET

Copyright (c) 2022 Dow Jones & Company, Inc.

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