Stocks have bounced from bottom and now convincingly back above the 200 day moving average with Thursday’s impressive +1.89% gain for the S&P 500 (SPY).

The reason for this bullish leg was investors “reading between the lines” of the Wednesday Fed announcement that they seem reluctant to raise rates again. That increases the odds of lower rates ahead which is music to the ears of stock investors.

But is that really what the Fed has in mind?

And what if the recent lowering of bond rates is actually because investors see a softening of the economy that may devolve into a recession?

That and more is on the docket for today’s commentary.

Market Commentary

The Fed announcement on Wednesday is the central story for investors. They decided to leave rates unchanged for a second straight meeting. Thus, the real market moving news came from Powell’s press conference. The quick summary is not much change from the path. Maybe a little nuance in some of the responses I outline below.

Powell stated that a few good months of inflation data is just the beginning. More work to be done. What is unclear is whether that will require more rate hikes or if rates are properly restrictive to get inflation back to trend and just need them in place for a longer period of time.

Further they still believe that an eventual softening of the economy and job market will have to show up before the job of taming inflation is done. Not necessarily a recession…still shooting for that magical soft landing (often easier to say than to do).

Powell was emphatic on this point: NO TALK OF RATE CUTS.

They are just still focused on getting inflation down to 2% target and how much more time and/or rate hikes are needed to get there. But yes, they are seeing the benefits of their previous moves at work. Just takes time to fully see those affects play out.

Stock prices immediately doubled their gains from the time of the press conference til the end of the session. This makes sense as you appreciate that 10 Year Treasury rates moved further below 5%. That includes an additional drop to 4.66% on Thursday which was a big catalyst for more stock gains.

Also interesting is checking out the FedWatch tool by the CME measuring the odds the market is laying on future Fed meetings. For example, the idea of a rate hike at the next meeting on 12/13 was almost cut in half to just 19.8%.

The oddity we need to consider is that the lowering of bond rates may actually be because of a weakening of the economy. Yes, that tames inflation. And yes, that leads to a lowering of Fed funds rates. But also equates to lower corporate earnings and lower share prices. That is why its important to keep a close eye on the economic activity at this time.

That starts this week with the ISM Manufacturing that was kind of overlooked on Wednesday as the Fed took center stage. Yet, as foreshadowed by the weak Chicago PMI report on Tuesday, indeed the national ISM Manufacturing survey on Wednesday showed softening of business trends as the reading slipped from 49.0 to 46.7. Even worse the forward looking New Orders component was even lower at 45.5.

Friday mornings Government Employment Situation report also pointed to slowing trends with 150K jobs added when 190K was expected. This also got served up with signs of moderating wage inflation at only +0.2% month over month which is ebbing ever closer to the 2% annualized target of the Fed.

Stocks jumped premarket Friday on the above news as it is immediately seen as a “Goldilocks report. Not too hot to raise inflation. Not too cold to point to recession. But with employment being a lagging indicator, and 150K jobs added being one of the lowest readings in a long time, then not hard to imagine it getting weaker from here.

For now stocks have found an interim bottom. It will stay that way as long as bond rates stay at this level or below…and as long as the economy avoids recession. Add to that the typical bullish bias during the holiday season (aka Santa Claus rally) then likely the overall market is likely to move higher from here til the year end.

Not necessarily gung ho bullish like the last few session. More of an upward bias perhaps getting back to towards a range of 4,400 to 4,500 by years end.

Just to be clear, if the odds of recession and bear market increase, then investors will not care what time of year it is. Thus, we will lean bullish for now, but keep a close eye on the economic picture in case there is a reason to get more cautious in our outlook.

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Steve Reitmeister…but everyone calls me Reity (pronounced “Righty”)
CEO, StockNews.com and Editor, Reitmeister Total Return

SPY shares were trading at $433.90 per share on Friday morning, up $3.14 (+0.73%). Year-to-date, SPY has gained 14.72%, versus a % rise in the benchmark S&P 500 index during the same period.

About the Author: Steve Reitmeister

Steve is better known to the StockNews audience as “Reity”. Not only is he the CEO of the firm, but he also shares his 40 years of investment experience in the Reitmeister Total Return portfolio. Learn more about Reity’s background, along with links to his most recent articles and stock picks. More...

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