Federal Reserve Chairman Jerome Powell.
Kevin Dietsch/Getty Images)
Even bear markets get bounces.
The stock market had a terrific week, and for the first time in a long time, the rally feels like it can last. The Dow Jones Industrial Average rose 5.4%, the S&P 500 gained 6.4%, and the Nasdaq Composite climbed 7.5%.
Give Federal Reserve Chairman Jerome Powell credit. In testimony before Congress, he said that engineering a soft landing had become “very challenging,” suggesting that getting inflation under control could lead to a recession. Under normal circumstances, that would be a worrisome sign. But everyone was already talking about the possibility of a slowdown, so his acknowledgment of the possibility served as a strange source of relief, if only because it might mean less-aggressive rate increases in the future.
Expectations for inflation in the University of Michigan consumer sentiment survey also dipped from the preliminary read earlier this month. Now, the odds of the federal-funds rate hitting a range of at least 3.25% to 3.5% in November fell to 50%, down from 71% a week ago, and that’s much easier for the market to handle.
Powell’s testimony also came at the right time for the market. Investors had gotten extremely pessimistic, and many had a staggering amount of cash on hand after the recent selloff—Bank of America noted its private clients had 12.6% of their assets in cash, the most since October 2020 and above the historical average of 12.4%. Others might not have any choice but to buy given the fact that the first half of the year ends on Thursday, forcing some portfolios to rebalance.
Normally, rebalancing gets a lot of attention, but it only really matters when the market is volatile and liquidity is tight, as it has been this year, according to Marko Kolanovic, chief global markets strategist at J.P. Morgan. The S&P 500 rallied 7% during the last week of the first quarter and about 7% the last week of May—and it could rally again as we go into the last week in June, Kolanovic writes.
Even Stifel strategist Barry Bannister, who correctly predicted this year’s downswing, now says that the S&P 500 is likely headed higher. It isn’t that he suddenly turned bullish—he still believes the U.S. entered a long-term bear market in 2022—but rather that bear markets never simply move in one direction.
For now, he thinks that the technology sector, particularly semiconductors and hardware, including Apple (ticker: AAPL), will lead the stock market higher. “[It will be] a classic countertrend rally this summer,” writes Bannister, who sees the S&P 500 hitting 4150, up 13% from the index’s June 16 low of 3666.77.
That’s likely where the rally runs out of steam. Just as bull markets can suffer downside corrections, bear markets experience corrections of their own, and technical analysis suggests the index should bounce to somewhere between 4000 and 4100, according to 22V Research’s John Roque. Just don’t count on it going too much higher. “[It’s] still a bear market,” he says.
Don’t forget it.
Write to Ben Levisohn at [email protected]
