Even bear markets rebound.
The stock market has had a terrific week, and for the first time in a long time, the rally looks set to last. The
Dow Jones Industrial Average
increased by 5.4%, the
gained 6.4%, and the
Give credit to Federal Reserve Chairman Jerome Powell. In testimony before Congress, he said engineering a soft landing had become “very difficult”, suggesting that getting inflation under control could lead to a recession. Under normal circumstances, this would be a worrying sign. But everyone was already talking about the possibility of a slowdown, so his acknowledgment of the possibility was a strange source of relief, if only because it could mean less aggressive rate increases in the future.
Inflation expectations in the University of Michigan Consumer Sentiment Survey also fell from the preliminary reading earlier this month. Now the probability of the fed funds rate reaching a range of at least 3.25% to 3.5% in November has fallen to 50%, from 71% a week ago, and it is much easier to manage for the market.
Powell’s testimony also came at the right time for the market. Investors had become extremely pessimistic, and many had a staggering amount of cash on hand after the recent sell-off – Bank of America noted that its private clients had 12.6% of their assets in cash, the most since October 2020 and beyond. above the historical average of 12.4%. Others may have no choice but to buy given that the first half of the year ends on Thursday, forcing some portfolios to rebalance.
Normally, rebalancing gets a lot of attention, but it only really matters when the market is volatile and liquidity is tight, as has been the case this year, according to Marko Kolanovic, strategist Head of Global Markets at JP Morgan. The S&P 500 rebounded 7% in the last week of the first quarter and around 7% in the last week of May – and it could rally again at the start of the last week of June, writes Kolanovic.
Even Stifel strategist Barry Bannister, who correctly predicted this year’s decline, now says the S&P 500 is likely headed higher. It’s not that he suddenly turned bullish – he still believes the US entered a long-term bear market in 2022 – but rather that bear markets never simply move in one direction.
For now, he thinks the tech sector, especially semiconductors and hardware, including
(ticker: AAPL), will drive the stock market higher. “[It will be] a classic countertrend rally this summer,” writes Bannister, who sees the S&P 500 hit 4150, up 13% from the index’s June 16 low at 3666.77.
This is probably where the rally runs out of steam. Just as bull markets can undergo downward corrections, bear markets experience their own corrections, and technical analysis suggests the index should rebound somewhere between 4000 and 4100, according to John Roque of 22V Research. Don’t expect it to go too high. “[It’s] still a bear market,” he says.
Do not forget it.
Write to Ben Levisohn at [email protected]