Analysis: Investors take stock of US stocks’ recovery: ‘sucker rally’ or market bottom? – Reuters | Region & Cash

A Wall Street sign in front of the New York Stock Exchange in New York City, New York, U.S., October 2, 2020. REUTERS/Carlo Allegri/File Photo

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NEW YORK, July 27 (Reuters) – As investors await another gargantuan rate hike from the Federal Reserve, they are taking the temperature of a week-long US stock market rally that followed a vicious sell-off in the first half of the year.

Even after Tuesday’s sharp drop, the S&P 500 remained up 7% from its June 16 low, helped in part by expectations that the Fed will pause its aggressive rate hikes early next year and a recent fall in commodity prices that has driven the Investors hope it will ease inflation.

So far, the jump has had its share of doubters. Three similar-magnitude rallies have already subsided this year, with stocks falling to new lows each time. Blackrock, the world’s largest wealth manager, warned investors on Monday that more volatility was ahead and said it was underweight developed market stocks on expectations that inflation would remain persistent.

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“We believe this is a bear market sucker rally,” said Steve Chiavarone, senior portfolio manager at Federated Hermes, who believes the Fed will remain hawkish for longer than expected and has reduced his equity exposure as the S&P has declined in recent weeks has climbed to the top.

Expectations that the Fed will end its market-damaging rate hikes sooner than forecast have given equities a boost. According to CME, nearly two-thirds of investors now believe the Fed’s interest rate will be at 3.5% or below by March 2023, up from just a third a month ago. Continue reading

Investors expect the Fed to tighten another 75 basis points on Wednesday after raising rates by 150 basis points this year. FEDWATCH hopes of moderation thereafter could be dashed if consumer prices remain stubbornly high in the coming weeks – repeating a scenario that has dragged stocks lower this year, Blackrock strategists wrote.

“Inflation data could surprise to the upside – and cause the markets to quickly price in a higher interest rate path again. Result: another stock sale,” BlackRock strategists wrote.

Data from the Wells Fargo Investment Institute showed that the severity of the current bear market — which has taken the S&P 500 down as much as 23.6% from its January high — could depend on whether the economy is in recession. Continue reading

Bear markets accompanied by a recession lasted an average of 18 months, during which stocks fell an average of 35.8%. Without a recession, bear markets lasted an average of 5.9 months with an average decline of 27.9%, the bank’s data showed.

On Sunday, US Treasury Secretary Janet Yellen acknowledged the risk of a recession but said it was not inevitable. Read more Still, even as broader averages have rallied, parts of the market continue to reflect investor unease.

More stocks in the Nasdaq Composite Index have made 76 days of new lows than new highs, the longest such stretch in 20 years, said Willie Delwiche, investment strategist at All Star Charts. The index is up nearly 9% from its June low.

“Until this relationship changes, it’s premature to say a bottom has been reached,” Delwiche said.

More optimistic investors are pointing to a number of signals that suggest bearish sentiment may have reached a crescendo in recent weeks, potentially exhausting sellers and making it easier for stocks to recover.

A fund manager survey by BoFA Global Research last week showed expectations for global growth and earnings at all-time lows and liquidity levels at their highest in two decades, two contrarian indicators bank strategists said could point to larger stock gains in the future.

S&P 500 short interest recently stood at its highest level since the depths of 2020’s coronavirus sell-off, a signal that has occurred during past market bottoms, the bank’s strategists wrote.

“We think it’s possible that the S&P 500 has already bottomed and, if not, will bottom in the third quarter,” said Lori Calvasina, head of US equity strategy at RBC Capital Markets, in a Notice to Investors.

Calvasina recently added equity exposure, betting that a possible recession is already burned into prices. Continue reading

Christopher Murphy, co-head of derivatives strategy at Susquehanna International Group, believes this week’s earnings reports — which include results from heavyweights like Apple Inc and Meta Platforms — could play a key role in deciding whether stocks can keep going higher. Continue reading

“The risks to the market are very well known right now” and are already reflected in prices, he said.

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reporting by David Randall; Editing by David Gregorio

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