Stocks surge on same old story, but nothing has changed from previous

on Oct 5, 2022
Updated: Oct 8, 2022
  • Stocks have surged to their best two-day return since 2020
  • Renewed hope that Fed will pivot following jobs report and lower-than-expected rate hike in Australia
  • We have seen this time and time again this year, writes Dan Ashmore

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Another day, another big stock market move off the back of hopes of a pivot from the Federal Reserve.

In approximately the thousandth such occurrence this year, stocks have bounced sharply off renewed hope that the Federal Reserve is somewhat bluffing with its hard-lined stance against interest rate hikes.

The Dow added 800 points Tuesday, with the Nasdaq surging – overall, stocks have posted the best two-day surge since 2020. Sure, not exactly an earth-shattering sample space, but it feels good to write about some positive news for a change.

Why are markets going up?

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The renewed hope from investors that the Federal Reserve would soften actually stemmed from news Down Under.

The Reserve Bank of Australia hiked only 25 bps, surprising the market which had assumed a 50 bps jump was incoming. It is the first central bank to reserve course on large rate hikes, as the 25 bps hike represents the smallest iteration. And investors in the US have wasted no time in piling into stocks accordingly.

Coupled with some slower-than-expected job growth – you know, bad news is good news because it means the Fed will hike less – means the market is getting some well-earned relief. Job openings in August fell by 1.1 million, which sounds awful, but it is also a slowing labour market is necessary to ease inflationary woes.

And with inflation easing, rate hikes would cease – and bingo, stocks go to the moon.

What will the Federal Reserve do?

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It’s just the latest reminder that the macro climate is running the show. Stocks are jumping and falling off expectations of what the Federal Reserve will do with interest rates.

For me, this little bout of news doesn’t change anything. Expectations of rate rises peel back slightly, and stocks accordingly have moved upwards. Nothing less, nothing more.

Ray Dalio, billionaire investor and frequent resident in the LinkedIn “influencer section”, weighed in with interesting comments asserting that he had moved off his previous views that “cash is trash” and now believes it is a neutral investment, given the rate rises and shrinking of the Fed’s balance sheet.

“The short-term interest rate is now about right”, he said.

Whether big Jerome Powell is in agreement with Dalio is another issue. And it is quite precisely the issue that will move markets. If some more data comes out today suggesting the Fed will not be reversing course, the gains will promptly be given back. Right now, there really is nothing more important than inflation and Federal Reserve intentions.

It’s Jerome Powell’s world, and we are all just living in it.


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