By John Lau
October 3, 2022 – Stocks staged a historic rebound yesterday (Thursday), as the S&P 500 went from down nearly 3% pre-market (after the CPI) to up nearly 3% by the close, completing a somewhat unthinkable 6% turnaround. Given this turnaround, I wanted to explain clearly and succinctly 1) Why it happened and 2) What it means for markets.
Importantly, I do not believe that the rebound was driven by fundamentals. There was nothing good in yesterday’s CPI report, as it showed inflation is sticky while odds of a 75-bps rate hike Fed at next month’s FOMC meeting jumped to 100%. Instead, the rebound was a combination of news that support for the Truss spending/tax cut plan has totally eroded and hope that the ECB policy is less hawkish than feared:
Rebound Reason 1: Truss U-turn. This was likely the single biggest “reason” for the rebound, as reports circulated throughout the day that U.K. PM Truss may do a “U-turn” on most of her fiscal initiatives. Remember, the S&P 500 was trading around 3,800 before the U.K. fiscal debacle, so if it goes away, it’s reasonable to expect a rebound back towards that level.
Rebound Reason 2: Peak ECB hawkishness? A Reuters report hit mid-morning yesterday that implied the ECB “terminal rate” may be just 2.25% versus the previous expectation of 2.75% and a broad dovish reaction saw everything from stocks and bonds to oil and bitcoin rip higher in late-morning trade.
What Does the Rebound Mean for Markets?
In truth, not much. Stocks were very oversold and we saw a violent “sell the rumor, buy the news” reaction as markets expected a hot CPI and got it, but an oversold condition and some positive headlines created a massive short squeeze. Positively, if we can get an official “U-turn” from Truss and better-than-feared earnings next week, this rally can continue towards the upper 3,000’s in the S&P 500 before running into material valuation headwinds. But don’t confuse yesterday’s reversal with a bottom. Just because markets have become numb to high inflation/hawkish Fed doesn’t mean it won’t continue to weigh on multiples, economic activity, and earnings. To get true stabilization in this market we still need 1) Proof of a decline in inflation and 2) A Fed pivot, and neither have occurred.
At Robertson Stephens, we will use any material bounce in stocks as an opportunity to “right size” portfolios for continued volatility and ensure that exposure is where it needs to be for a continuation of this difficult market via raising some cash or buying less-volatile and defensive sectors, ETFs or assets (e.g. shorter-term bonds). Bottom line, yesterday’s reversal was certainly welcomed, but let’s not confuse it with a bottom.
Disclosures
Investment advisory services offered through Robertson Stephens Wealth Management, LLC (“Robertson Stephens”), an SEC-registered investment advisor. Registration does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. This material is for general informational purposes only and should not be construed as investment, tax or legal advice. It does not constitute a recommendation or offer to buy or sell any security, has not been tailored to the needs of any specific investor, and should not provide the basis for any investment decision. Please consult with your Advisor prior to making any investment decisions. The information contained herein was compiled from sources believed to be reliable, but Robertson Stephens does not guarantee its accuracy or completeness. Information, views and opinions are current as of the date of this presentation, are based on the information available at the time, and are subject to change based on market and other conditions. Robertson Stephens assumes no duty to update this information. Unless otherwise noted, any individual opinions presented are those of the author and not necessarily those of Robertson Stephens. Performance may be compared to several indices. Indices are unmanaged and reflect the reinvestment of all income or dividends but do not reflect the deduction of any fees or expenses which would reduce returns. A complete list of Robertson Stephens Investment Office recommendations over the previous 12 months is available upon request. Past performance does not guarantee future results. Forward-looking performance objectives, targets or estimates are not guaranteed and may not be achieved. Investing entails risks, including possible loss of principal. Alternative investments are only available to qualified investors and are not suitable for all investors. Alternative investments include risks such as illiquidity, long time horizons, reduced transparency, and significant loss of principal. Please refer to the private placement memorandum for a complete listing and description of terms and risks. This material is an investment advisory publication intended for investment advisory clients and prospective clients only. Robertson Stephens only transacts business in states in which it is properly registered or is excluded or exempted from registration. A copy of Robertson Stephens’ current written disclosure brochure filed with the SEC which discusses, among other things, Robertson Stephens’ business practices, services and fees, is available through the SEC’s website at: www.adviserinfo.sec.gov. © 2022 Robertson Stephens Wealth Management, LLC. All rights reserved. Robertson Stephens is a registered trademark of Robertson Stephens Wealth Management, LLC in the United States and elsewhere.
Why Did Stocks Rebound Yesterday, and What Does It Mean for Markets?
By John Lau
October 3, 2022 – Stocks staged a historic rebound yesterday (Thursday), as the S&P 500 went from down nearly 3% pre-market (after the CPI) to up nearly 3% by the close, completing a somewhat unthinkable 6% turnaround. Given this turnaround, I wanted to explain clearly and succinctly 1) Why it happened and 2) What it means for markets.
Importantly, I do not believe that the rebound was driven by fundamentals. There was nothing good in yesterday’s CPI report, as it showed inflation is sticky while odds of a 75-bps rate hike Fed at next month’s FOMC meeting jumped to 100%. Instead, the rebound was a combination of news that support for the Truss spending/tax cut plan has totally eroded and hope that the ECB policy is less hawkish than feared:
Rebound Reason 1: Truss U-turn. This was likely the single biggest “reason” for the rebound, as reports circulated throughout the day that U.K. PM Truss may do a “U-turn” on most of her fiscal initiatives. Remember, the S&P 500 was trading around 3,800 before the U.K. fiscal debacle, so if it goes away, it’s reasonable to expect a rebound back towards that level.
Rebound Reason 2: Peak ECB hawkishness? A Reuters report hit mid-morning yesterday that implied the ECB “terminal rate” may be just 2.25% versus the previous expectation of 2.75% and a broad dovish reaction saw everything from stocks and bonds to oil and bitcoin rip higher in late-morning trade.
What Does the Rebound Mean for Markets?
In truth, not much. Stocks were very oversold and we saw a violent “sell the rumor, buy the news” reaction as markets expected a hot CPI and got it, but an oversold condition and some positive headlines created a massive short squeeze. Positively, if we can get an official “U-turn” from Truss and better-than-feared earnings next week, this rally can continue towards the upper 3,000’s in the S&P 500 before running into material valuation headwinds. But don’t confuse yesterday’s reversal with a bottom. Just because markets have become numb to high inflation/hawkish Fed doesn’t mean it won’t continue to weigh on multiples, economic activity, and earnings. To get true stabilization in this market we still need 1) Proof of a decline in inflation and 2) A Fed pivot, and neither have occurred.
At Robertson Stephens, we will use any material bounce in stocks as an opportunity to “right size” portfolios for continued volatility and ensure that exposure is where it needs to be for a continuation of this difficult market via raising some cash or buying less-volatile and defensive sectors, ETFs or assets (e.g. shorter-term bonds). Bottom line, yesterday’s reversal was certainly welcomed, but let’s not confuse it with a bottom.
Disclosures
Investment advisory services offered through Robertson Stephens Wealth Management, LLC (“Robertson Stephens”), an SEC-registered investment advisor. Registration does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. This material is for general informational purposes only and should not be construed as investment, tax or legal advice. It does not constitute a recommendation or offer to buy or sell any security, has not been tailored to the needs of any specific investor, and should not provide the basis for any investment decision. Please consult with your Advisor prior to making any investment decisions. The information contained herein was compiled from sources believed to be reliable, but Robertson Stephens does not guarantee its accuracy or completeness. Information, views and opinions are current as of the date of this presentation, are based on the information available at the time, and are subject to change based on market and other conditions. Robertson Stephens assumes no duty to update this information. Unless otherwise noted, any individual opinions presented are those of the author and not necessarily those of Robertson Stephens. Performance may be compared to several indices. Indices are unmanaged and reflect the reinvestment of all income or dividends but do not reflect the deduction of any fees or expenses which would reduce returns. A complete list of Robertson Stephens Investment Office recommendations over the previous 12 months is available upon request. Past performance does not guarantee future results. Forward-looking performance objectives, targets or estimates are not guaranteed and may not be achieved. Investing entails risks, including possible loss of principal. Alternative investments are only available to qualified investors and are not suitable for all investors. Alternative investments include risks such as illiquidity, long time horizons, reduced transparency, and significant loss of principal. Please refer to the private placement memorandum for a complete listing and description of terms and risks. This material is an investment advisory publication intended for investment advisory clients and prospective clients only. Robertson Stephens only transacts business in states in which it is properly registered or is excluded or exempted from registration. A copy of Robertson Stephens’ current written disclosure brochure filed with the SEC which discusses, among other things, Robertson Stephens’ business practices, services and fees, is available through the SEC’s website at: www.adviserinfo.sec.gov. © 2022 Robertson Stephens Wealth Management, LLC. All rights reserved. Robertson Stephens is a registered trademark of Robertson Stephens Wealth Management, LLC in the United States and elsewhere.
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