The Dow Jones index exited bearish territory yesterday, having completed an increase of more than 20% from its annual low point on September 30, thus meeting the criterion for entering bullish territory. The jump in the index since September is also the Dow’s highest two-month gain since July 1938, according to Dow Jones market data.
The jump in the index occurred after the chairman of the Federal Reserve, Jerome Powell, this week signaled the possibility of a slowdown in interest rate increases. And yet, it was not enough to repair the damage caused to the markets by the tight monetary policy led by the Fed over the past year. Aggressive interest rate hikes against inflation have given investors more opportunities to earn returns outside the market, thus lowering the value of companies’ future earnings.
Chance of a soft landing
When Powell hinted that the Fed was on track to raise interest rates by half a percentage point at its December meeting, after a series of four 0.75% rate hikes, optimism in the markets strengthened. The S&P 500 rose 122.48 points, or 3.1%, to 4080.11. The Dow Jones added 737.24 points, or 2.2%, to 34589.77. The Nasdaq advanced by 484.22 points, or 4.4%, to 11468.00, all against the background of the strengthening of the major indices during the last weeks.
“Powell’s speech gave more hope to the elusive possibility of a soft landing,” Hank Smith, head of investment strategy at the Haverford Trust, told the Wall Street Journal. “From the market’s point of view, there is a chance of a soft landing as opposed to a hard landing, i.e. a traditional recession.”
However, similar to the opinions of the experts that are heard recently after every recovery, there are those who want to remind not to be blinded by the surge and to be careful. History shows many examples of stocks rising in the midst of a bear market, only to eventually plummet and wipe out all those gains. Sharp increases accompanied by decreases have already occurred more than three times since the beginning of 2022: in March, July and August, and again since mid-October, according to FactSet data published in “Market Watch”.
A striking example can be seen after the bursting of the dot-com bubble. The Nasdaq posted at least seven gains of 20% or more before hitting its final cycle low in 2002.
Investors are cautious and skeptical
Against this background, and given that the Fed is still raising interest rates, strategists remain cautious. It is difficult to say when a bear market has truly ended, because the beginning of a new bull market is often only apparent in hindsight, similar to the challenge of determining the beginning of a recession.
As the Dow climbed at the end of last week, Mark Happel, chief investment officer at UBS Global Wealth Management, warned that investors should expect more volatility.
“We remain skeptical of a scenario in which the recent surge marks the beginning of a new market character. The Fed’s priority is likely to remain fighting inflation, pending a more consistent flow of price data and softer employment data. Against this backdrop, we prefer to invest in fixed income assets such as Government bonds,” said Hafele to “Market Watch”.