US stocks and bonds jumped after a speech by Federal Reserve Chair Jerome Powell on Wednesday, but some investors believe an impending recession could limit gains in both asset classes.
While asset prices have been hurt by the Fed’s rate hikes this year, the momentum has been on the earnings side in recent weeks. The S&P 500 is up nearly 14% from its October lows, while the benchmark 10-year Treasury yield, which is inverse to price, is down about 3.6% from a 15-year high of 4.3. % earlier this year.
The immediate reaction to Powell’s speech on Wednesday underlined the upbeat mood among investors. The S&P 500 rose more than 3% after Powell said the Fed could slow the pace of rate hikes as early as December, although he warned there was little clarity on how much rates would need to rise as the central bank grapples with the worst inflation in decades.
Still, some market participants believe record weeks in stocks and bonds are set to fade, a reversal that has seen many other recovery moves this year. The S&P 500 is down 14.4% in 2022.
The upcoming US jobs and inflation reports — scheduled for Dec. 2 and Dec. 13, respectively — could become short-term hurdles if they don’t show that the rate hikes the central bank has already made this year have sufficiently cooled the economy.
US consumer prices rose less than expected in October, reinforcing the view that inflation is easing.
Down the road, some of Wall Street’s biggest banks are now predicting that the Fed’s tightening of monetary policy will bring about a recession next year.
The inversion of the Treasury yield curve — a signal that preceded previous recessions — has strengthened forecasts for contraction. The yield on the two-year Treasury recently surpassed the 10-year Treasury by its biggest margin since 2000.
Among the banks forecasting a slowdown is Bank of America, whose analysts see a broadly flat S&P 500 as markets deal with the “recession shock”.
The BlackRock Investment Institute said on Wednesday that while a recession is likely, “equity valuations still don’t reflect future damage.” They are also underweight long-term government bonds, betting that central banks are unlikely to stop cutting rates in a downturn if inflation remains high.
To what extent economic worries impact the market’s near-term bullish mood remains to be seen. The S&P 500 traded above its 200-day moving average on Wednesday for the first time since April, a move that some traders who follow the charts see as a sign of near-term stock strength.
Source: CNN Brasil
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