Is the Bear Market Rally Already Over?

Stocks opened lower this morning before recovering through noon. Around 1pm EST, the S&P even managed to rise enough to dip into positive territory for the month of May.

The broader market index was up roughly 0.75% on the month at the time of writing.

And that’s a huge accomplishment for bulls, given just how far the S&P had fallen in response to a mid-month rate hike from the Fed that took the federal funds rate 0.50% higher several weeks ago.

“Higher inflation and slower growth are now the consensus view but that doesn’t mean it’s fully discounted,” wrote Morgan Stanley’s Mike Wilson, warning bulls to not be overly enthusiastic about the recent swing.

“Last week’s strength will prove to be another bear market rally in the end.”

Mega-cap tech stocks led the market higher nonetheless. Google-parent Alphabet (NASDAQ: GOOG) jumped more than 2% while Amazon (NASDAQ: AMZN) advanced roughly 3%. Facebook-parent Meta (NASDAQ: FB) gained 1% as market-topping shares Apple (NASDAQ: AAPL) and Microsoft (NASDAQ: MSFT) traded relatively flat.

Wilson continued in his note, adding:

“The primary rationale ascribed to this particular rally beyond just an oversold bounce is that the Fed may be contemplating a [rate hike] pause in September.”

And that’s absolutely true. Last week, we covered this following the release of the May FOMC minutes, in which investors learned that the Fed revised down its inflation projections for 2023 to just 2.5%

Right now, the federal funds rate sits squarely at 1.00%. The Fed is expected to only raise rates three more times, by 50 basis points (0.50%) per hike, concluding in September as a result.

Prior to that, the market assumed that Fed Chairman Jerome Powell would raise rates well into early 2023 and beyond.

With that bearish impulse seemingly off the table as of last Wednesday, bulls have run wild ever since. “Bad news is good news” trading has returned.

That was evidenced by a better than expected economic data release this morning, which showed that the MNI-Chicago PMI – a regional Chicago manufacturing report – clocked-in at 60.3 last month. Economists expected a reading of 55.

Anything over 50 is considered expansion.

And, of course, stocks fell in response, dragged down further by the Conference Board’s latest consumer confidence reading.

“Views of current business conditions—which tend to move ahead of trends in jobs—improved. Overall, the Present Situation Index remains at strong levels, suggesting growth did not contract further in Q2,” the report read. Consumer confidence hit 106.4 for May opposite forecasts of just 103.5.

Oil prices surged, too, after the European Union reported that it would stop purchasing Russian crude oil and petroleum products. This was the most bearish development of the morning, as a renewed climb in crude prices could spike inflation to levels higher than the Fed expects, prompting a stricter tightening schedule.

Buoyed by the September rate hike halt, however, mega-cap shares ended up rising anyway, saving the market from a more severe correction.

That’s not to say bulls are entirely out of the woods, though. They probably aren’t.

But, like in the major rally of mid-March, the stage has certainly been set for an even stronger rally from here, given that a major surprise source of inflation doesn’t spring up in the meantime.

Like a sudden crude rally driven by more countries cutting ties with Russian oil.


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