Stocks are having a perfect October. Why might a bear-market rally have more room to run?

An earlier version of this story misstated the date of the US midterm elections. They will be held not on November 9, but on November 8.

Despite a number of risky developments facing investors in the coming weeks, some on Wall Street believe the recent bear market rally in stocks has more room to run.

Although the S&P 500 SPX
Dow Jones Industrial Average DJIA,
and Nasdaq Composite COMP,
remains mired in bear markets, with stocks rebounding from “oversold” levels as major indexes fall to two-year lows. Bear markets are known for sharp spikes, such as the rebound that sent the S&P 500 up more than 17% since mid-June, before sliding back to set a new 2022 low on Oct. 12.

However, there are a few things investors should keep in mind.

Markets have a lot of event risk

Microsoft Corp. On top of a flurry of corporate earnings this week, including some of the biggest megacap tech stocks like MSFT,
and Inc. AMZN,
investors will also get some key economic data reports over the next few weeks – including a reading from the Fed’s preferred inflation gauge on Friday and October jobs numbers due out on November 4.

In addition, the Fed has its next policy meeting scheduled to conclude on November 2. The Fed is expected to raise interest rates by another 75 basis points, the fourth “jumbo” hike this year.

Mid-term US elections, which will determine which party controls the House of Representatives and the Senate, are scheduled to be held on November 8.

Investors are still trying to parse the Fed’s latest change in messaging

Investors welcomed what some market watchers described as a coordinated shift in messaging from the Fed last week, through an Oct. 21 report in The Wall Street Journal that the size of the Fed’s December rate hike would be discussed, along with comments. From San Francisco Fed President Mary Daly.

Still, the Fed isn’t expected to turn around materially anytime soon.

Because the fact remains: According to Steve Sosnick, chief strategist at Interactive Brokers, after nearly two years of extraordinary monetary and fiscal stimulus that emerged in the wake of the COVID-19 pandemic, there’s a lot of bubble that needs to be squeezed out of the markets.

“It’s easier to inflate a bubble than to deflate it, and I don’t use the term ‘bubble’ pejoratively,” he told MarketWatch during a phone interview.

Richard Farr, chief market strategist at Merion Capital Group, downplayed the impact of the Fed’s recent “coordinated” guidance change, saying the impact on the terminal fed-funds rate was relatively insignificant in an interview with MarketWatch.

Fed-fund futures traders expect the upper end of the central bank’s key target rate to rise to 5% by the end of the first quarter next year and remain there until the end of the fourth quarter, according to CME’s FedWatch tool, a complete surprise.

Market technicians believe that stocks may rise slightly

So far, October isn’t shaping up to polish off the worst first nine months of the calendar year, like September, when stocks fell 9.3%.

Instead, the S&P 500 is already up more than 5.5% since early October, despite briefly collapsing to its lowest intraday level in more than two years following the release of the September consumer price index report earlier this month.

Read: Bear killers and crashes: What investors need to know about October’s complicated stock market history

Fairlead Strategies market strategist Katie Stockton said in a note shared with clients and MarketWatch that technical indicators suggest the S&P 500 could continue to extend its gains from last week.

He said the next key level to watch in the S&P 500 is north of 3,900, 100 points above where the index closed on Monday.

“Short-term momentum remains to the upside in the context of a year-to-date downtrend. Support near 3,505 was the natural stage for a relief rally, and initial resistance is near 3,914,” he said.

A key bear sees a marketable opportunity

Mike Wilson, Morgan Stanley’s US chief equity strategist and chief investment officer, has been one of Wall Street’s most outspoken bears for more than a year now.

But in a note to clients earlier this week, he reiterated that the stock was ripe for a bounce.

“Last week’s tactical bullish call was met with skepticism by clients, which means there is still bullishness ahead as we move from Fire to Ice – falling inflation expectations could lead to lower rates and higher share prices if companies fail to deliver on 2023 EPS guidance,” Wilson said.

This earnings season is off to a good start

At this point, market strategists said, it’s safe to say that the third-quarter earnings season has allayed fears that the Fed’s rate hikes and low inflation have already dramatically eroded profit margins.

According to Howard Silverblatt, chief index analyst at S&P Dow Jones Indices, the quality of earnings already reported beat some of the initial “whisper numbers” discussed by traders and strategists.

Overall, companies reported earnings that beat expectations by 5.4%, according to data Refinitiv shared with the media on Monday. This compares to the long-term average since 1994 of 4.1%.

However, when the energy sector is taken out of the equation, the outlook looks bleaker. According to Refinitiv data, the diluted annualized profit estimate for the third quarter is -3.6%.

While investors are still anticipating earnings for about three-quarters of S&P 500 firms, some — like Morgan Stanley’s Wilson — are already looking ahead to next year as they expect the earnings outlook to darken significantly, possibly leading to a decline, according to FactSet data. earnings recession — when corporate earnings decline for two consecutive quarters.

The outlook for the global economy remains weak

Speaking of energy, crude oil prices offer a dire warning about the outlook for the global economy.

“Much of the weak oil reflects expectations that the global economy will be in recession and near recession,” said Steve Englander, global head of G-10 currency strategy at Standard Chartered.

West Texas Intermediate crude oil futures CLZ22,
Oil settled lower on Monday as choppy import data from China and the end of a Communist Party leadership conference signaled softening demand in the world’s second-largest oil consumer. Prices continued to decline on Tuesday.

Beware of “fighting the Fed”.

Investors are worried that “something else could go wrong” in the markets, MarketWatch reported over the weekend.

Such fears inspired the Fed’s apparent leadership change, Sosnick said. But the fact remains: Anyone buying stocks should be prepared to take losses, at least in the near term, as the Fed tightens monetary policy aggressively, he said.

“The simplest thing is: ‘Don’t fight the Fed.’ What do you do if you’re trying to buy stocks now? That doesn’t mean you can’t buy stocks in general. But that means you’re fighting an uphill battle,” he said.

The VIX indicates that investors are expecting a wild ride

While stocks extended their October rebound for another session on Monday, the Cboe Volatility Index VIX,
rose sharply, reflecting the notion that investors don’t foresee the market’s wild ride ending anytime soon.

Wall Street’s “fear gauge” ended Monday’s session up 0.5% at 29.85, just shy of Tuesday’s 30 level.

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