Oct 5, 2022 - Economy & Business

Stocks smell a Fed pivot, bonds not so much

Data: FactSet; Chart: Kavya Beheraj/Axios

Investors seem to think the Fed is close to pivoting away from relentless rate hikes.

Driving the news: The S&P 500 just notched its best two-day run — up 5.7% — since the early days of the COVID crisis when the Fed rushed in to, basically, keep the economy from collapsing.

  • Tuesday's 3.1% gain for the benchmark index was the best of the year. (Twitter's 22% gain helped — but stocks were up across the board.)

The big picture: The atrocious performance this year of both stocks and bonds has been driven almost entirely by the Fed's effort to raise rates to tamp down inflation.

Between the lines: Stock market investors seem to think that potential pain — and afterward, a pivot away from rate hikes — could come sooner than they thought even a few days ago.

The reasons: New data shows the U.S. jobs engine may be starting to sputter. Openings in August collapsed by more than 1 million.

Yes, but: The bond market doesn't share the stock market's conviction that we're near the end of the rate-hiking cycle. If it did, we'd see yields on Treasury bonds falling more sharply.

What we're watching: For confirmation that this is just another bear market rally, the type of periodic upswing — like the one we saw over the summer — that can take hold from time to time despite the broader downward trajectory that defines a bear market.

  • If we don't get confirmation from Fed officials that they think they're getting inflation under control, expect this rally to peter out, too.

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