Stocks ripped higher this morning as fears over an Evergrande bankruptcy cooled. The FOMC is set to wrap up its September meeting this afternoon, too, and investors expect a dovish statement from Fed Chairman Jerome Powell to follow.
As a result, sentiment’s looking far more bullish than it has in several weeks, and for good reason.
Yes, share values certainly appear overvalued long-term and economic difficulties are coming for the US economy by year’s end. Wall Street has already reduced its 2021 GDP projections by a significant amount in response to slowed growth.
In the short term, though, things are looking up. The Evergrande crisis shocked equities into a rapid selloff last Monday. But Beijing is now expected to bail out Evergrande through China’s numerous state-owned banks, splitting up the company into smaller parts to reduce the risk of another major collapse.
Will it be painless? Absolutely not.
However, there also won’t be a “Lehman-like” catastrophe that leaks into global markets. Analysts expect a far better-than-expected outcome from the whole situation than they did on Monday morning. And if China delivers in that regard, stocks could surge.
The most positive man on Wall Street, Fundstrat Founder Tom Lee, “think[s] we’re still in a position where, ultimately, stocks are going to rally hard off this, because unless Evergrande is going to cause a real seismic effect on the US economy, the US fundamentals are in good shape.”
Lee has called for major rallies on every recent dip. And, each time, his prediction came true.
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If Lee’s proven right again, a bronze statue bearing his likeness could (or should) be built alongside Wall Street’s famous Charging Bull. The fund manager certainly deserves it after years of continued bullishness despite persistent bearish “triggers” that have threatened stocks repeatedly since the start of the Covid pandemic.
Meanwhile, Sevens Report founder Tom Essaye warned traders that volatility could remain an issue moving forward, even if the market rallies to finish out the week.
“A dovish Fed (or even a Fed that meets expectations) could provide more of a relief rally today, but we continue to think the sheer number of unknowns remain a headwind that will keep markets volatile for the next few weeks, until there’s more clarity on the Fed, taxes, government funding and earnings,” wrote Essaye in a note.
Historically, Powell hasn’t had a positive effect on stocks when he speaks. Bespoke Investment Group analysts observed this fact in a recent note that looked at the price performance of the last few Fed chairs.
“When it comes to the late-day weakness on Fed Days, much of it has come during Fed Chair Powell’s tenure,” Bespoke researchers said.
“Since Powell became chair, the S&P 500 has averaged the worst performance on Fed Days of any other chair since [Alan] Greenspan.”
So, traders hoping for an afternoon rally might not get one. That doesn’t mean, however, stocks will sink on Thursday or Friday. Bulls have a tendency to get nervous when Powell speaks.
Later on, though, sentiment usually flips positive once more.
Will that happen again? It absolutely could, especially following Monday’s big drop, which likely provided traders with yet another fantastic dip-buying opportunity in a runaway bull market.