The market roller-coaster continues, with the worst September in 20 years followed by the best start to a quarter since 1938 and the S&P 500′s biggest two-day gain since April 2020.
The rally was accompanied by renewed talk of a dovish pivot by the Federal Reserve. Investors have begun cheering softer-than-expected economic data, hoping macro weakness might persuade the Fed to turn less hawkish. Bad news is good news.
However, we’ve been here before. Hopes of a Fed pivot drove a fierce summer rally before indices turned south after Fed chairman Jerome Powell’s uncompromisingly hawkish speech at Jackson Hole in August. Mr Powell’s stance was echoed last week by Atlanta Fed president Raphael Bostic, who issued a “not so fast” warning to markets and stressed the fight against inflation was likely “still in early days”.
It would be wise, then, not to assume stocks have turned the corner. Sentiment hit a bearish extreme in late September and stocks were heavily oversold. The proverbial rubber band was stretched to the downside, setting the scene for a powerful rebound.
It’s natural to hope stocks can advance from here, but the Fed’s message seems to be markets are not out of the woods yet.
