The road to year-end gains for stocks will be hammered by volatility as investors try to 'sniff out' a reversal in inflation and a Fed U-turn on rates

The road to year-end gains for stocks will be hammered by volatility as investors try to ‘sniff out’ a reversal in inflation and a Fed U-turn on rates

  • Stocks rose this week after the October inflation report, but the path to year-end gains remains volatile, market analysts said.
  • Inflation may have peaked, but CPI at 7.7% is still well above the Fed’s 2% target.
  • “I think we’re ready to rally at the end of the year… It’s not going to be a straight rally,” said Nancy Tengler of Laffer Tengler Investments.

The biggest rise in equities in two years was triggered this week by a report on cooling inflation, although analysts say that while further gains in equities may be in store this year, the Federal Reserve is little likely to provide the so-called pivot that investors have been waiting for. .

Investors on Thursday embraced the Labor Department report showing headline inflation eased slightly to 7.7% in October from a 40-year high of 8.2% the previous month. Economists widely expected a rate of 8%. Core inflation slowed to 6.3% from 6.6%. The numbers sparked a rally that sent stocks to their best session since 2020. The Nasdaq Composite climbed 7.4%, the S&P 500 gained 5.5% and the Dow Jones Industrial Average jumped nearly 1 200 dots.

“I think we’re ready to rally until the end of the year, barring a major exogenous event. It’s not going to be a straight rally. It’s going to continue to be volatile, I would say, probably through the first quarter,” Nancy Tengler, chief investment officer and managing director of Laffer Tengler Investments, told Insider.

“And then I think we’re in good shape to take off because valuations aren’t out of step with what we’ve been historically at comparable fed funds rate levels,” she said.

People covering short positions and the outsized influence of trading algorithms appear to have helped fuel Thursday’s rally, Tengler said, taking a broader view of that day’s rise.

Following the inflation report, investors began pricing in higher odds that the Federal Reserve would reduce the magnitude of its next interest rate hike in December to 50 basis points. The Federal Open Market Committee has raised rates by 75 basis points in its last four meetings, leaving the federal funds rate in a range of 3.75% to 4%.

The “market sniffed out a reversal in inflation,” said Tengler, who said his store estimated inflation peaked in June when the CPI hit 9.1%, as food prices and energy surged.

The economy appears to have entered four to five months of a weaker inflation regime and forward indications such as the purchasing managers’ indices suggest a further slowdown in inflation, Tengler said. “I don’t think we’re going back to 2% anytime soon,” she said of the Fed’s target.

Another inflation report is expected before the next Fed meeting. The November data will be released on December 13, the same day policymakers begin their last two-day meeting of 2022.

“Inflation is almost double the fed funds rate … so I think there will still be some [rate] increases, more than people want or maybe less,” Michael Landsberg, chief investment officer at Landsberg Bennett Private Wealth Management, told Insider. The company has $1 billion in assets under management.

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“I don’t think there is a [Fed] pivot anytime soon,” he said. Whether the Fed raises rates 75 basis points for the fifth straight time in December or cuts them to 50 basis points will depend on the data. The Fed, along with other measures underway, could consider remaining aggressive in the face of continued rallies in stocks, he said.

Thursday’s rally helped Wall Street’s major indexes pare their year-to-date losses, with the Dow Jones Industrial Average down about 7% midday Friday.

Landsberg said the Dow could manage to swing into positive territory for the year, but he sees the trend generally down for stocks.

“Typically you don’t see 5%, 6% moves in indices in bull markets. We’re seeing a lot of volatility, short hedging here – one of the reasons things have gone up so much,” he said. he declared. “I’m watching what’s going to happen as we start to see more companies laying people off.”

Layoff announcements accelerated with news from Facebook parent Meta and Twitter arriving this week. In October, U.S.-based employers announced 33,843 job cuts in October, a nearly two-year high, according to outplacement firm Challenge, Gray & Christmas.

“I predict that we will end the year [in stocks] where we were before this big gathering,” Tim Pagliara, chief investment officer at CapWealth, told Insider. The Tennessee-based wealth management firm oversees $1.2 billion in assets.

Pagliara said his projection applies to the S&P 500, Dow industrials and the Nasdaq as investors engage in tax-loss selling next month and, at the same time, wait to see the makeup of Congress after the results of the midterm elections will be settled. .

Meanwhile, core and headline inflation remains well above the Fed’s comfort level, he said.

“If there’s still work to be done with inflation, then rates will go up further. How far they have to go and how far it will be extended until next year really remains a question,” he said. said Pagliara. “So unless the Fed has redefined and tolerates much higher inflation than the 2% target they have, I don’t think things will change much.”

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