October 5, 2022
Good morning,
Last month, September, the S&P 500 Index plummeted -9.3%, the index’s worst monthly performance since March 2020. The first two trading days of this month, October, the S&P 500 Index is up +5.7%, the best two day move for the Index since April 2020. The primary difference between then and now is the Fed. In 2020, in response to the global pandemic, central banks around the world, were about to embark on the largest stimulus program ever. Today, not so much – the Fed and global central banks are doing just the opposite. They are tightening.
Is this week’s rally just another bear market rally that will ultimately fail and be followed by new lows like the other three we’ve had this year? If the Fed executes on their recently stated priority of breaking inflation and possibly over-tightens, then yes, this week’s rally is probably the bear market kind.
However, it currently seems that a wide majority of investors think this week’s rally is just a bear market rally to be ignored. Remember, the market does what surprises the most and it often pays to be contrarian. I do think the market’s certitude will be the fuel to possibly run this rally longer and further than most currently believe it can go. Similar to this summer’s 10 week rally.
Investing well is a business of probabilities and being flexible to change as the data changes may be the most important characteristic of a successful investor. What I’ve laid out above is what I think is the high probability path. Does it mean that last Friday’s closing new low cannot be this bear market’s ultimate low and that the market has already discounted the worst of the Fed’s charge to break inflation. It does not. There is room for that eventuality, but if that is the path this market is on we’ll know it as the market data improves. So far, that just hasn’t happened yet. We remain open to the possibility.
Futures are off a percent this morning – a correction within a correction? Most likely. A little pause and consolidation makes a bit of sense after such a roaring start to the month.
Be well,
Mike