Stocks gain on Powell dovish remarks, outlook remains cloudy – Stock Market News



Major US indices realised broad gains on Wednesday after Federal Reserve Chair Jerome Powell reaffirmed that the Bank will most probably slow down the pace of its aggressive monetary tightening. Moreover, risky assets got an additional boost after China announced that it will soften some Covid-19-related restrictions. However, many market participants endorse that the latest upswing in equity markets is bound to fizzle out soon as recession fears have not yet been fully priced into corporate valuations. Is this the case?

Stocks extend rebound

US stocks ended November on a solid note on the back of Powell’s speech, which opened the door for smaller and slower interest rate increases by the Fed in an effort to achieve a soft landing for the US economy. The latest rally secured Wall Street’s first back-to-back monthly gains since 2021 and sent the Dow Jones more than 20% above its recent low. Nevertheless, it could also be argued that the market appears over-optimistic as Powell’s latest remarks did not add any significant new piece of information that could alter the current policy outlook macroeconomic backdrop.

On Friday, the major US stock indices opened lower and erased some of their latest gains as the stronger-than-expected NFP report applied upside pressure on Treasury yields.

Easing inflation vs slowing growth

Lately, investors have been highly optimistic that the Fed’s campaign against inflation has been successful, increasing their expectations of a more gradual rate hike pace going forward. Even though this is partially true and we are indeed entering a period of softening inflation, market participants continue to underestimate the probability of a severe economic slowdown and its corresponding effect on equity markets.

Historically, equities tend to rebound once inflation has peaked given that a recession is avoided. However, this time, equity investors must cope with an explosive cocktail that includes recession woes, overstretched valuations and extremely high earnings projections for next year. Hence, the latest rebound could be considered naïve and there is a high chance that it could backfire on investors.

Are we entering a new era?

Since the end of the global financial crisis, most central banks around the world have intervened multiple times to control yield curves, which squeezed returns in fixed income assets. This development shifted funds towards stock markets as bonds became essentially a dead asset. However, it seems that this monetary regime has come to an end and many tenors of the yield curve are starting to become fully market derived.

Looking forward into 2023, the big question that lies ahead is whether we are entering a prolonged period of high inflation and central banks have abandoned quantitative easing for good, in which case, bonds could actually offer better risk-adjusted returns than stocks for the foreseeable future.

S&P 500 in crucial technical territory

Taking a technical look, it is clear the S&P 500 index is currently near a very important territory, which could prove to be a good test for the sustainability of the index’s latest advance.

To the upside, if the rally resumes, the S&P 500 index could challenge the crucial 200-day simple moving average (SMA), currently at 4,062. Breaking above its latest trend reversal point, the price could then ascend to test the descending trendline taken from the index’s recent highs before it faces the 4,120 resistance barrier.

To the downside, bearish forces may encounter initial support at 3,907, or lower, the November bottom of 3,700 could curb any further declines.

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