Wall Street continues its bear market rally, but risks remain on the downside
Wall Street ended higher yesterday after the Fed hinted a slowdown in rate hikes could be imminent. The minutes showed that “a substantial majority of participants believed that a slower rate of increase would likely be appropriate soon”, but it should be noted that “several” officials believed that the final rate was higher than before.
Equity markets were supported by falling government bond yields, a weaker dollar and a strong rise in Tesla (+7.8%). The California automaker took advantage of a reclassification from “Sales” to “Neutral” by Citigroup to recover nearly 8%.
The uptrend was not unusual for Thanksgiving week, so a seasonal variance was likely another supportive factor.
Wall Street may continue its short-term uptrend, but the underlying outlook remains bearish. There is a good chance that the upswing we have been experiencing for several weeks is just another “bear market rally” and stock markets are in for new lows given the rising risk of a global recession. Indeed, the tightening of health restrictions in China, the energy crisis and the tightening of financial conditions on a global scale should put increasing pressure on equity markets in the coming months.
At this point, a global recession does not appear to be priced in given the resilience of investor earnings expectations and credit spreads.