Opinion: here’s how you should play the markets through year-end
S&P 500 ended more than 5.0% up on Thursday after the U.S. Bureau of Labour Statistics said consumer prices were not up as much as expected in October (source).
Naturally, the first question that pops up following a positive surprise like that, and more importantly, a rally like that, is “would it last?”
After all, that’ll feed into the way you would play the market from here on. Now, as far as I’m concerned, the upside will sustain “in the near term” – and here’s why.
Several ‘mini’ factors at play here
To begin with, the data itself suggests that inflation has finally peaked. That creates at least some room for the central bank to consider turning less aggressive on the rate hikes. Patrick Harker – President of the Federal Reserve Bank of Philadelphia also said this morning that he finds it appropriate to raise the funds rate to about 4.50% and then taking a “pause”.
Moving on, sure, we didn’t get the “red wave” that was oh-so-talked about heading into the midterm elections. But it’s a gridlock, nonetheless. And that has historically been a net positive for the markets.
Put it together with the better-than-expected monthly inflation data and, of course, the “seasonality” and you’ll see why I expect the U.S. stocks to keep resilient into the end of the year.
What do the ‘technicals’ tell us?
Even from the technical perspective, the 200-day Moving Average sits at about 4,100 level.
And then there’s what I would call a “pent up demand” for investing – particularly with some of the quality names trading at deep discounts; people want to go in. Things have been so negative for so long that they’ll celebrate even the bits and pieces of good news for as long as they possibly can.
And that’s why I wouldn’t really be surprised if we go all the way up to test that key resistance at the 4,100 level.
It’s still just a bear market rally
Don’t get me wrong, though. The bigger picture is not lost on me. Despite the economic news today, inflation is still well above the 2.0% target, Fed is still raising, the U.S. economy is still headed for a slowdown. By no means am I calling in a bottom.
We’re still in a bear market and a single CPI print is not enough to change that. But all of that is probably a 2023 story. In the near term, into the end of the year, I do think we’ll see a little bit more of “greens”.
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