Why the Dow is finally bouncing back — and how to prove it’s real

A little pre-summer cheer finally seeps into the stock market the week before Memorial Daybut it may take longer than the Dow Jones Industrial Average’s first winning week since late March to convince panicked investors that the pain is over.

what happened? Mahmood noted that real interest rates, or rates adjusted for inflation, have fallen over the past week, corporate credit spreads — the yield premiums investors demand over U.S. Treasuries when they buy bonds issued by companies — have tightened, and investors are more optimistic about the Fed’s future increase. The expected slowdown in interest rates has slowed, said Noorani, CEO of research firm Quant Insight, in an interview (see chart below).

Quantitative Insights

This provides some breathing room for the rebound. Quant Insight’s model shows that the S&P 500 has fallen below fair value, but is now in line with the metric.

S&P 500 Index,
+2.47%
The company narrowly avoided a close in bear market territory on May 19 after hitting an intraday low more than 20% below its Jan. 3 record close. It then rose 6.6% over the past week and closed Friday 13.3% below its early-January peak as it snapped a seven-week losing streak.

Nasdaq Composite Index,
+3.33%,
The stock, still firmly in bear market territory, also snapped a seven-week losing streak, rising 6.8%. Dow Jones,
+1.76%
The matched 6.8% gain marked the end of an eight-week losing streak, the longest since 1932.

Renaissance Macro Research analyst Kevin Deempter also pointed to positives, including a sharp pullback in the dollar, severely oversold technical conditions and extreme pessimism, while some stocks, such as Nvidia Corp. NVDA,
+5.38%,
Despite the bad news, it managed to reverse the upside.

View: The S&P 500 may be looking for a short-term bottom — but medium-term concerns remain

However, neither Noorani nor Deempter are ready to call the market bottom. And there is no shortage of outright bearish expectations. Michael Burry, founder of Scion Asset Management, rose to fame after foreseeing the collapse of the U.S. housing market, as documented in Michael Lewis’ book “The Big Short” , in a tweet that has been deleted implicit similarities With the market crash of 2008.

In a new tweet Friday, he pondered the prospect of a consumer-led recession:

This echoes concerns raised by retailer Target TGT in early May,
+2.41%
and Walmart WMT,
+1.97%
The disappointing earnings report sparked a deepening sell-off in stocks amid concerns that inflationary pressures are starting to hit bottom lines.

Noorani said a further pullback in real yields could send stocks higher in the near term, but he believes yields are unlikely to have peaked.

After all, although data, including Core Personal Consumption Expenditure Index to be released on FridayHe argues that the Fed’s preferred measure of inflation shows inflation is slowing and that the job of reining in price pressures is far from done.

That leaves uncertainty about how high the current federal funds rate, currently 0.75% to 1%, will end up. He said the market was pricing in the so-called terminal rate of between 2.5% and 3%, but anything suggesting it would go above that level would rattle investors.

The single most important driver of yields “will be Fed policy,” he said, observing that central bankers “have been spooked by these historically high levels of inflation.” Even if it’s painful for the real economy, “they have to hit the brakes really hard to get those numbers lower.”

While the S&P 500 hasn’t technically confirmed it’s in a bear market, many market watchers see it as a mere formality and observe that stocks have been exhibiting bear market behavior throughout much of the 2022 sell-off.

In a Friday report, Deempter downplayed the consumer discretionary sector’s sharp outperformance in the previous session, acknowledging that historically, the relative performance of the consumer discretionary sector occurs about a month before a trough in growth. greatly improved. He believes the move could be an oversold rally rather than a bottoming out, explaining that “if growth slows and inflation has peaked,” RenMac would be more optimistic.

“History shows that both growth and inflation need to weaken further before bottoming out,” he said, noting that the energy sector’s continued outperformance over health care suggests inflation has not peaked.

read more: This stock market gauge suggests investors think inflation hasn’t peaked: Analysts

“We will be watching the ISM next week [manufacturing index] numbers, as weak readings could push the market cycle clock closer to more favorable bottom territory,” he said.