Nov 4, 2022 - Economy

No, we're not out of the woods yet

Gif of the bear market rocking a bar graph

Illustration: Sarah Grillo/Axios

Wall Street is lulling itself into (yet another) bear market rally.

Why it matters: On Friday, October jobs data that defied economists expectations sent major benchmarks on a tear. Yet the market’s action belies an outlook that’s still tilting toward recession, and a Federal Reserve that’s as committed as ever to stamping out inflation with higher rates.

Driving the news: Earlier this week, the Fed dashed hopes of a “pivot” to less aggressive tightening, speculation of which had bolstered brisk gains in the Dow and S&P 500 Index.

  • Last month, stocks posted their best month since 1976 (sucker’s rally, anyone?) — partly in hopes that the central bank would pull back on the monetary policy throttle, and avoid a hard landing for the economy.

The intrigue: In spite of the rally, analysts are warning that yes, we’re still in a bear market, and no, the downward drift of growth and earnings don’t justify the market’s bullish tone.

What they’re saying: In a research note issued Friday, Morgan Stanley flatly pointed to “fundamentally bearish, with leading indicators showing further deterioration.”

  • Weaker growth could eventually force the Fed to slow down, but the firm says the S&P could rally as high as 4150 “ before the next leg of this bear market, which we target closer to 3000-3200.” Caveat emptor, indeed.

The bottom line: Even with the carnage wrought by this year’s bear market, stocks are still too rich for comfort. According to DataTrek Research co-founder Nick Colas, stocks are still trading at multiples well above likely recession-level earnings.

  • “In yesterday’s press conference Chair Powell said he was not especially worried about a deep recession since the Fed can always cut rates to support the US economy. Perhaps, at the margin, investors believe the same thing,” Colas wrote.
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