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The shares have a fantastic October. Why the bear market rally may have more room to run.




An earlier version of this story misstated the date of the US midterm elections. They are held on November 8th, not November 9th.

Despite a series of risky events facing investors in the coming weeks, some on Wall Street believe the latest bear market rally in stocks has more room to run.

Although the S&P 500 SPX,
+1.18%,
Dow Jones Industrial Average DJIA,
+0.73%
and Nasdaq Composite COMP,
+13.82%
remain mired in bear markets, stocks have retreated from “oversold” levels as the major indexes fell to their lowest levels in two years. Bear markets are known for sharp pullbacks, such as the decline that took the S&P 500 up more than 17% from its mid-June low before falling back to set a new 2022 low on October 12.

With that said, here are some things for investors to keep in mind.

There are plenty of event risks that markets face

On top of a deluge of corporate earnings this week, including some of the largest megacap technology stocks such as Microsoft Corp. MSFT,
+0.87%
and Amazom.com Inc. AMZN,
+0.25%,
investors will also receive some key economic data reports over the next couple of weeks – including a reading from the Fed’s preferred inflation gauge on Friday, and the October jobs numbers, due out on November 4.

In addition to that, there is also the Fed’s next policy meeting, which ends on 2 November. The Fed is widely expected to raise interest rates by another 75 basis points, the fourth “jumbo” increase this year.

Mid-term elections in the US, which will decide which party controls the US House and Senate, will take place on November 8.

Investors are still trying to parse the Fed’s latest message shift

Investors cheered what some market watchers described as a coordinated shift in Fed messaging last week, conveyed via an Oct. 21 report from The Wall Street Journal that indicated the size of a Fed rate hike in December would be up for debate, along with comments. from San Francisco Fed President Mary Daly.

Nevertheless, the Fed is not expected to change significantly anytime soon.

Because the fact remains: there’s a lot of foam to be squeezed out of the markets after nearly two years of extraordinary monetary and fiscal stimulus unleashed in the wake of the COVID-19 pandemic, according to Steve Sosnick, chief strategist at Interactive Brokers.

“It’s easier to inflate a bubble than to pop it, and I don’t use the term ‘bubble’ in a way,” he said during a phone interview with MarketWatch.

Richard Farr, market strategist at Merion Capital Group, downplayed the impact of the Fed’s latest “coordinated” shift in guidance during an interview with MarketWatch, saying the impact on the fed funds terminal rate is relatively insignificant.

Fed-funds futures traders expect the upper end of the central bank’s policy target to rise to 5% before the end of the first quarter next year, and remain there potentially into the fourth quarter, although an earlier cut would not be a complete surprise, according to CME’s FedWatch tool.

Market technicians think stocks may move slightly higher

So far, October doesn’t look like it will be anything like September, when shares fell 9.3% to post the worst first nine months of a calendar year in two decades.

Instead, the S&P 500 has already gained more than 5.5% since the start of October despite briefly crashing to its lowest intraday level in more than two years following the release of the September CPI report earlier this month.

Read: Bear killers and crashes: What investors need to know about October’s complicated stock market story

Technical indicators suggest the S&P 500 could continue to build on last week’s gains, said Katie Stockton, market strategist at Fairlead Strategies, in a note she shared with clients and MarketWatch.

According to her, the next key level to watch for on the S&P 500 is north of 3,900, more than 100 points above where the index closed on Monday.

“Short-term momentum remains to the upside within the framework of the downtrend so far this year. Support near 3,505 was a natural staging ground for a relief rally, and the first resistance is near 3,914,” she said.

A key bear sees a tradable opportunity

Mike Wilson, Morgan Stanley’s chief US equity strategist and chief investment officer, has been one of Wall Street’s most outspoken bears for more than a year now.

But in a note to clients early this week, he reiterated that shares looked ripe for a bounce.

“Last week’s tactical bullish call was met with skepticism from clients, meaning upside remains as we transition from Fire to Ice – falling inflation expectations could lead to lower rates and higher share prices in the absence of capitulation from companies on 2023 EPS guidance,” Wilson said.

This earnings season has gotten off to a good start

At this point, it’s safe to say the third-quarter earnings season has overcome fears that the Fed’s rate hikes and gnawing inflation have already dramatically eroded profit margins, market strategists said.

The quality of earnings already reported has surpassed some of the early “whisper numbers” that traders and strategists have been touting, according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.

Collectively, the companies report earnings 5.4% above expectations, according to data from Refinitiv shared with the media on Monday. This compared to a long-term average – since 1994 – of 4.1%.

But when the energy sector is removed from the equation, the outlook seems much more bleak. The blended year-over-year earnings estimate for the third quarter is -3.6%, according to the Refinitiv data.

While investors are still awaiting earnings from about three-quarters of S&P 500 companies, according to FactSet data, some — like Morgan Stanley’s Wilson — are already looking ahead to next year as they expect the outlook for profits to darken significantly, possibly leading to an earnings recession — when a company’s earnings shrink for two consecutive quarters.

The outlook for the world economy remains weak

Speaking of energy, crude oil prices are showing an ominous warning about expectations for the global economy.

“Much of the weakness in oil reflects expectations that the global economy will be in recession and close to recession,” said Steve Englander, global head of G-10 currency strategy at Standard Chartered.

West Texas Intermediate crude oil futures CLZ22,
+0.67%
settled lower on Monday, as lackluster import data from China and the end of the Communist Party’s leadership conference suggested softer demand in the world’s second-largest oil consumer. Prices continued to drop early Tuesday.

Be Careful About “Fighting the Fed”

Investors remain concerned that “something else could break” in the markets, as MarketWatch reported over the weekend.

It’s possible that such fears inspired the Fed’s apparent shift in guidance, Sosnick said. But the fact remains: anyone buying stocks while the Fed is aggressively tightening monetary policy should be prepared to tolerate losses, at least in the short term, he said.

“The simplest of all is: ‘don’t fight the Fed.’ “If you’re trying to buy stocks now, what do you do? That doesn’t mean you can’t buy stocks overall. But it does mean you’re fighting an uphill battle,” he said.

The VIX signals that investors expect a wild ride

Although stocks extended their October gains for another session on Monday, the Cboe Volatility Index VIX,
-3.65%
remained conspicuously elevated, reflecting the notion that investors don’t expect the market’s wild ride to end anytime soon.

Wall Street’s “fear gauge” ended Monday’s session up 0.5% at 29.85 and was trading just outside the 30 level early Tuesday.



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