Bulls don’t fear hawks right now. Or at least, the cries of hawks don’t scare bulls once the screeching has become so familiar as to sound monotonous. That’s one way to explain last week’s sprightly 3.6% rebound in the stock market following three straight down weeks, as a half-dozen Federal Reserve officials including the Chair and Vice Chair promised more sizable interest-rate hikes with ringing clarity. They want short-term rates to get at least near 4% (from the current range of 2.25 to 2.5%) with 0.75 points of that likely coming the week after next. While there was cursory mention by Vice Chair Lael Brainard of a risk of overtightening, Fed Gov. Christopher Waller implied unemployment could rise as high as 5% before it would give him pause. But not much of this was new, and the same old warnings generate less fear — especially for a market that had entered the week wracked by anxiety after half the rally off the June low had been unwound. Two weeks ago, just after Fed Chair Jerome Powell’s warning of economic pain at Jackson Hole, this column argued that a quick return to those June depths, where the S & P 500 bottomed at 3636, seemed unlikely — in part because the wall of worry already stood pretty high. “It probably wouldn’t take much more market weakness or Fed growling to get pessimism to contrarian extremes again,” was the call, and as it happens the S & P did start generating those oversold and fearful conditions with a mere 2.5% further drop. By early last week, the trusty equity exposure index among the tactical professional investors in the National Association of Active Investment Management had fallen back toward multi-year lows. This action rhymed with what Bank of America global strategist Michael Hartnett called “appalling” risk sentiment, a fevered volume of put-option downside insurance bought in recent weeks and (finally) some appreciable outflows from equity funds. Behind the week’s comeback Excess pessimism and offsides positioning had compressed the market spring, but it released with the help of more benign economic inputs that keep alive the prospect of a soft landing, of some sort, for this cycle. The GDP-tracking models are modestly positive for the current quarter, job growth and jobless claims have been healthy, the services sector is hanging in there, consumer card spending is holding up. And — crucially — nearly every observable leading indicator of inflation is pointing decidedly lower, beyond just gasoline to used cars and freight rates and airline tickets. This helps explain why the market can accept the Fed’s hawkish admonition that no pause in rate hikes is planned or foreseen, and policy makers refuse to anticipate any help on inflation. For one thing, the floated 4% short-rate goal is not very far off in distance or in time, likely at hand by the turn of the year, and if inflation cooperates by dropping appreciably, the message will turn from jacking rates up quickly to holding them there. After an early-week peak at a 20-year high, the US Dollar Index eased back in recent days, reflecting a momentary pause in tightening financial conditions and opening some daylight for oversold stocks to rebound. Earnings forecasts for the current quarter have been coming down, though in a fairly orderly way so far that hasn’t come as much of a shock to a market that fell a maximum of 23% and registered its worst first half of a year in half a century. Coming out of Labor Day weekend, there was some apprehension that the bustling slate of September investor conferences could turn into a litany of companies divulging weaker business trends and talking down their profit outlook. But no such theme emerged. Wells Fargo strategists wrote, “By our count there were around 25 Street-sponsored industry conferences in the US alone (and several more overseas) during this holiday-shortened week. We did not note any major earnings warnings emerging from these meetings—a positive signal.” Still caught in trading range The absence of fresh bad news and a short-term comeuppance for aggressively positioned bears were enough to usher in last week’s rally, leaving the S & P 12% above its intraday June low. And it gave the index chart the look of a possible constructive setup, with the recent rally starting from around the higher May low. (The S & P financial sector, tracked by the Financial Select Sector ETF , has essentially the same formation, which bulls hope could develop into a so-called reverse head-and-shoulders bottom.) Still, let’s be clear, this market is in a trading range since before Memorial Day. The S & P 500’s high on May 10, exactly four months ago, was 4068. It closed Friday at 4067 – which itself is just 10 points above where it closed two weeks ago, the day of Powell’s “pain” remarks at Jackson Hole. This can easily be seen as a show of resilience, even if it leaves the bulls with more left to prove. While in general the indexes have had trouble this year making positive progress with the 10-year Treasury yield well above 3%, the relationship might have loosened, given that the last time it was at the current 3.3% level on June 16, the Nasdaq Composite was 12% lower. Credit markets are hanging tough, too, junk-bond spreads pulling in from recent highs and keeping some distance from stressed readings. Last week saw some of the heaviest new corporate-debt issuance of the year, more than $50 billion worth, an indication the capital markets are still open. The market remains, of course, in a longer-term downtrend, and sits a few percent short of its 200-day average, a line that halted the June-August rebound rally in its tracks. There’s been a pattern this year of mid-month inflection points roughly around options expiration, which is next week, and September’s rough reputation historically has mostly been earned in the later part of the month. And, yes, however expected further rate moves now are, the Fed continues to tighten into a bumpy economy with a hobbled housing market, and with the next rate hike the 3-month-to-10-year Treasury yield curve will likely invert, historically a reliable precursor to recessions. In other words, there’s not likely to be an unambiguous “all clear” signal any time soon. But there rarely is. This is a fairly battle-tested market, the recent action fully compatible with a messy, fitful potential bottoming process, one that would require a pretty serious new jolt to jeopardize the year-to-date maximum-loss level. It’s tough to summon greater conviction in the upbeat case than that, though it remains somewhat reassuring that so few seem even to be trying to.
