Bear Market Rally Resumes

Stocks gapped up at the open despite weak manufacturing data (see below). Currently, the Dow is up 570 points and the S&P 500 is up 2.7%. All eleven major market sectors are in the green, led by consumer discretionary, real estate, and communications. The VIX Index edged down to 31, still considered elevated. Most commodities are in rally mode today—oil +.7%, gold +1.2%–as the dollar finally showed some weakness. The bond market is broadly higher, with junk outperforming safe-haven Treasuries.

The Empire State Manufacturing Index, a New York regional business activity survey, fell for the third consecutive month, corroborating weakness in other recent manufacturing data. While hiring activity and new orders are still modestly positive, the six-month outlook deteriorated significantly.

The Wall Street Journal’s latest survey of economists suggests a high probability of recession in the next 12 months. Respondents put the chance of recession at 63%, the highest reading since July 2020. They expect a modest rise in unemployment as a result of the Federal Reserve’s interest rate hikes. The good news, however, is that they expect a rather shallow recession with economic growth contracting .2% in the first quarter of 2023 and .1% in the following quarter. We suffered worse than that in the fist half of this year.

Bank of America (BAC) beat Wall Street’s revenue & profit forecasts for the third quarter, and the stock is up 5.5%. Revenue rose 8% from a year ago, even as earnings fell 5%. Those metrics were better than peers JP Morgan, Citigroup, and Wells Fargo reported last week. CEO Brian Moynihan said, “Analysts might wonder whether the talk of inflation, recession and other factors could [result] in a slower spending growth. “We just don’t see” that. During September and the first half of October, credit & debit card transactions were 10% higher than last year. And average account balances remain higher than pre-pandemic levels. Loan delinquencies are extremely low.

How are those for conflicting signals? I suppose I can almost harmonize them by saying that current economic data is still fairly strong, but the fear of recession next year is palpable. My any measure, investor sentiment is sour. BMO’s Brian Belski last week said he believes “people are way too bearish, principally because we’ve become so short-term oriented, even more so than 2008.” He says long-term term investors should be looking for opportunities to buy, not sell.