Wall Street Rally Wipes Away Year of Losses

The dollar’s strength, powered by rates, has also withered with the Bloomberg Dollar Spot Index trading near levels seen in April 2022, down nearly 10% since its record high.

The S&P 500 index posted its mildest reaction on FOMC day in two years. Though it was the first in 11 meetings where policymakers held rates, they also lifted forecasts for higher borrowing costs of 5.6% in 2023, implying two additional quarter-point rate hikes or one half-point increase before the end of the year.

Contrast that with markets that hung on every word Fed officials said in the last year.

The bull market also flies in the face of 65% odds of a US recession within a year, by economists’ reckoning. The collapse of four regional banks and inversions all along the US Treasury curve back the case for an economic downturn.

Wall Street veteran Bob Michele anticipates a recession by the end of the year that will force a Fed pivot to easy policy.

For now, the American economy seems to have sustained the assault of rate hikes with resilient labor markets and mostly healthy corporate balance sheets.

Among the market’s biggest bears, Bank of America strategists upgraded their target for U.S. stocks and grew more optimistic on the economic outlook, forecasting a “later and more moderate downturn.”

But Peter Chatwell, for one, isn’t convinced the economy or markets can resist the pull of tighter policy for long. “The rally is typical of a bear market rally, rather than an outright bull market rally,” cautioned the head of global macro strategies trading at Mizuho International Plc. The run-up in prices is “on a weak foundation, vulnerable to a repricing to higher medium term interest rates.”

Whether or not the bull market is real, it’s attracting investors. In the last three weeks, global US equity inflows amounted to $38 billion, the strongest momentum of flows to the asset class since October, according to Bank of America, citing EPFR Global.

“Investors appear to have finally thrown the towel and start chasing the rally,” said Emmanuel Cau, head of European equity strategy at Barclays. “So long as U.S. recession keeps being pushed back, we think equities can continue to grind higher.”

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