Stocks finally rallied this morning as several bullish developments converged to push the market higher. The Dow, S&P, and Nasdaq Composite all gained significantly through noon.
Treasury yields slid alongside oil prices, lifting two major market pressures. Stocks temporarily dipped in response to a whisper from the Wall Street Journal that the Fed would raise rates by 75 basis points this Friday.
Shortly thereafter, though, equities rallied strongly on the latest GDPNow estimate. The Atlanta Fed reported this morning that real GDP growth (adjusted for inflation) for Q3 is just 1.4% as of today (September 7th), down from its 2.6% estimate on September first. That’s a major reduction in a very small amount of time.
The Atlanta Fed covered the specific details its GDPNow reading:
“After recent releases from the US Census Bureau, the US Bureau of Labor Statistics, the US Bureau of Economic Analysis, and the Institute for Supply Management, the nowcasts of third-quarter real personal consumption expenditures growth, third-quarter real gross private domestic investment growth, and third-quarter real government spending growth decreased from 3.1 percent, -3.5 percent, and 1.7 percent, respectively, to 1.7 percent, -5.8 percent, and 1.3 percent, respectively, while the nowcast of the contribution of the change in real net exports to third-quarter real GDP growth increased from 0.82 percentage points to 1.09 percentage points.”
In summary, the US economy is on track to notch its third quarter of negative growth. That revelation from the very accurate GDPNow tracker sparked the mid-morning rally.
And sentiment may grow even more bullish this afternoon. The Fed’s set to release its “Beige Book” – the Fed’s current snapshot view of the US economy – in a few hours. Richmond Fed President Tom Barkin and Cleveland Fed President Loretta Mester are expected to speak today, too. They helped crush stocks last week after delivering majorly hawkish statements.
Fed Vice Chair Lael Brainard will speak this afternoon as well. Brainard, who was famously the Fed’s biggest dove prior to this year, has gone hawkish after the Fed decided to present a more united front in the fight against inflation.
That poses a big risk to dip-buying bulls. In fact, it’s hard to think of a time over the last few months when a speech from a Fed president ended up helping stocks. Powell was known for kicking off major rallies during his post-FOMC remarks.
He’s had the opposite effect more recently. If stocks fail to hold on to their morning gains as a result of the Barkin/Mester/Brainard speeches, the S&P is likely to test support at 3,900 once more.
“With equities back to June lows and the rates path reset higher, more inflation easing along with decisive EU government intervention to tackle the energy crisis could prompt another bear squeeze,” said Barclays analyst Emmanuel Cau.
“Big picture, we think stocks remain in a tough spot given a poor growth-policy trade-off.”
That’s a good call from Cau. There’s nothing to be bullish about right now other than the fact that stocks appear very oversold.
A bear squeeze does seem inevitable at some point. And, as investors have seen multiple times this year, those bear market rallies can often be explosive in nature.
But will the arrival of another rally confirm that the market’s long-term low is in? Probably not. Europe has several huge hurdles approaching this winter when energy prices are expected to soar further. A broken paper energy market (which needs $1.5 trillion in liquidity from the government to fix according to Europe’s top energy trader) should make the coming energy price swings even more extreme.
Meanwhile, an economic slowdown threatens to slash corporate revenues in the US.
Investors are feeling bearish in the long term, and rightfully so. But that doesn’t mean stocks will point straight down forever. A big rally is lurking beneath the surface, just waiting to be unleashed, and the most obvious trigger point seems to be the market’s June lows – a price level that isn’t so far away any more following two weeks of vicious selling.