Stock Market News

Then came the big rebound.

“There’s been enough pessimism built into the markets and the markets getting stretched to the downside,” said Yung-Yu Ma, chief investment strategist at BMO Wealth Management. "It just allowed for the market to snap back.”

First, the bad news:

The consumer-price index rose at an annual rate of 8.2%, hotter than economists’ forecast for an 8.1% increase. It’s slightly lower than August’s reading of 8.3%.

Core CPI, which strips out the effect of the volatile food and energy components, rose 6.6% year over year from 6.5% last month. That indicates that price increases are broad, not just in oil and groceries, which have risen over last year’s levels.

The results are sending interest rates higher, much to the stock market’s chagrin. That inflation isn’t declining very quickly means that the Federal Reserve should remain fairly aggressive in lifting interest rates. The Fed revealed recently that it forecasts a peak federal funds rate, a short-term lending rate, of just over 4.5%. The central bank is trying to squelch inflation by reducing borrowing and spending in the economy, and its minutes released Wednesday revealed that it will remain vigilant on incoming inflation and other economic data.

The fed funds futures market now sees the rate moving up to a peak of just over 4.8%.

“The Fed will likely adopt a more data-dependent approach to rate hikes,” wrote Jason Pride, chief investment officer of private wealth at Glenmede. "Right now, that data is telling them that further tightening is needed to bring inflation back in the neighborhood of its 2% target."

The bond market is responding.

The two-year Treasury yield, a barometer for expectations about the fed funds rate, rose to 4.449%, a new multi-year high. The 10-year Treasury yield rose to 3.952%. It was even higher before, but is now below its multi-year closing high, hit in late September.

There is indeed a silver lining in all of this. The market is aware that higher rates often impact the economy on a delay. That means inflation could remain high in the near-term and then begin dropping more precipitously soon. That would mean the Fed could soon become less aggressive on rate hikes. That isn’t being reflected in the bond market today, but the stock market is tracking when that could happen.

“They [the Fed] need to see how things unfold because a lot of what they’re doing takes months if not quarters to show up in its final impact or damage,” said Jake Remley, senior portfolio manager at income research + Management. “We just haven’t had enough time to see.”

Combine that with the fact that market participants have already sold stocks in droves and it is not necessarily surprising to see investors buy the dip. Equity fund managers surveyed by Bank of America are holding about 6.1% of their funds in cash, the high end of the historical range.

"This smells of capitulation, which is why S&P has made back all of its losses today,” wrote NatAlliance Securities’ Andrew Brenner.

Simply put, the market had initially capitulated, which means traders began selling in droves – and in panic. In that state, the market had lost about half of its gain from its pandemic-induced bottom in March 2020. That "50% retracement” level was around 3500. That’s a key low point that can lure in buyers, Brenner noted. That often signals confidence in the market couldn't get any worse and those with money to put to work began buying stocks.

This doesn’t mean the stock market is out of the woods. In fact, it’s nowhere near that point. The S&P 500 has experienced several brief rallies since August. Each one has landed the index at lower peaks. Thursday’s rally brings the index to a level still below its high point for the month of October. Inflation and higher yields remain strong headwinds on the stock market.

The two-year Treasury note's yield closed the day at 4.45%, up from nearly 4.29% at Wednesday’s close. It hasn’t been that high since 2007. Bond prices and yields move inversely.

The 10-year Treasury note’s yield also surged. It ended the day at 3.95%, up from 3.9% at Wednesday’s close.

This all ties in with inflation and expectations about what the Federal Reserve will do as it seeks to keep prices from rising too fast.

"Goods prices are moderating, and services prices are accelerating, offsetting the goods moderation," said Peter Boockvar, chief investment officer at Bleakley Financial Group. "But the net result is going to be persistent and sticky inflation for a while that's going to result in further Fed rate increases."

The two-year Treasury is sensitive to the Fed funds rate, the central bank's policy rates, and at what level it is expected to peak. If the Fed stays hawkish in its tone and approach, that could lead to even more rate increases that the market is anticipating. Short-term rates could stay higher for longer, a scenario that the market hopes to avoid.

The Federal Open Market Committee is expected to raise interest rates again when it next meets on Nov. 1 and 2. It has increased the Fed funds rate by 0.75 percentage point, or 75 basis points, at three consecutive meetings, most recently in September.

The futures market is now putting the odds of another 75 basis-point increase early next month at nearly 100%.

In a statement Thursday after the CPI release, Chris Zaccarelli, chief investment officer for Independent Advisor Alliance, said that it makes sense for investors to stay defensive, partly in higher-quality bonds with shorter maturities that are less sensitive to changes in interest rates. He also cited “more recession resilient sectors like healthcare and inflation-hedge industries in the energy and materials sectors.”