Stocks gain on dovish FOMC minutes, year-end rally in focus – Stock Market News



Major US stock markets were buoyed on Wednesday, following the latest FOMC minutes release, which showed that most Fed officials are leaning towards a slowdown in the pace of upcoming rate hikes. This rhetoric was interpreted by market participants as the first ‘pivot’ acknowledgment and occurred in a period when historically most year-end rallies have begun. Considering that recession woes are replacing inflation concerns, could that prevent this year’s Santa-Claus rally?

Signs of Fed slowdown

Risky assets have been gaining lately on the back of the latest slightly dovish FOMC minutes, which indicated that the Fed will most likely reduce the pace of its tightening and potentially pause in the next few months. In addition, the latest weaker-than-expected US data combined with signs of easing inflationary pressures have been reinforcing the possibility of a ‘pivot’, but the anticipation of a higher terminal rate could overshadow the slower tightening pace.

The latest advance in stock markets suggests that investors seem to be solely focusing on the idea that peaking inflation and growth concerns would enable central banks to slow down their monetary tightening and eventually achieve a soft landing. However, this scenario is looking increasingly unlikely as slumping demand could soon tip global economies into recession, while at the same time analysts have not yet lowered their unrealistic earnings expectations for 2023.  Given that valuations remain uncomfortably high for the current macroeconomic backdrop, especially compared to previous stock market bottoms, it could be argued that this naïve positivity could backfire on investors.

Is this year any different?

After an extremely tough year for risky assets, we are entering a period that is historically believed to be a good one for equity investors due to the ‘Santa-Claus’ rally. This phenomenon is attributed both to behavioural biases and fundamental factors. On the one hand, there is an improvement in risk sentiment due to the holiday season euphoria, while on the other, fund managers tend to buy stocks in late December that have outperformed over the year for the so-called 'window dressing' of their portfolios.

In 2022, market participants should add more factors into the year-end rally equation such as the outcome of mid-term elections, recession fears and the speculation regarding the Fed’s ‘pivot’. In addition, the Black Friday spending will be an initial metric to judge how well the US consumer is holding up, given that the accumulated savings over the pandemic have been drawn down and the economy is approaching a more difficult stage of this year’s inflation shock.

Crucial technical levels in sight

Taking a technical look, it is clear the S&P 500 index is approaching a very important territory. Therefore, this could 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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