Investors plowed into the stock market this week after a monthly inflation report ended a streak of worse-than-expected data this year, fueling the biggest rally in years on hopes the Federal Reserve may be nearing the end of its interest rate hikes, but analysts and some officials have quickly pointed out the economy remains in flux and prone to recession—even if stocks suggest otherwise.

Stocks could continue to surge for another month, but “it’s still a bear market, so it could rip you ... [+]

KEY FACTS

After major indexes posted their best day since early 2020 on Thursday, the Dow Jones Industrial Average, S&P 500 and tech-heavy Nasdaq extended gains on Friday—climbing as much as 2% and highlighting investor relief over the October inflation report that showed inflation cooled more than economists expected last month, notes Oanda analyst Craig Erlam.

Though he acknowledged investors “have waited a long time” for promising news that inflation may be subsiding, Erlam cautions the stock market’s reaction to the number “looks a little extreme—overdone, even,” pointing out the report will need to be backed up by another solid showing next month in order for the Fed to be convinced inflation has slowed.

Citi analysts agreed, telling clients in a Friday note the one report doesn't indicate stocks are "all of a sudden in a bull market again"—particularly since potentially smaller corporate profits (squeezed by higher interest rates) remain a “major risk” in the first half of next year.

Nevertheless, the analysts say stocks may continue to rally in the next two to six weeks given the dearth of major economic data slated for release—a timeline Morgan Stanley’s Michael Wilson agreed with on Friday, when he told Bloomberg TV the S&P could rally another 7% to 4,300, as he also warned: “It’s going to remain volatile. . . . It’s still a bear market so it could rip you apart.”

Fed officials have been similarly cautious about the economy: “One month of data does not a victory make," San Francisco Fed President Mary Daly said Thursday, positing the risks of doing too little to tame inflation (as the Fed briefly did in the early 1980s) are worse than acting too aggressively and adding, "I am not prepared to make that mistake."

Striking a similar tune, Cleveland Fed President Loretta Mester on Thursday said inflation “has consistently proven to be more persistent than expected,” and that the “larger risks” stem from tightening too little as opposed to slowing the economy too much—even if it means gross domestic product turns negative again, as it often does during recessions.

Source : www.forbes.com/sites/jonathanponciano/2022/11/12/recession-watch-biggest-stock-market-rally-in-years-looks-overdone-since-fed-has-yet-to-beat-inflation/ by Jonathan Ponciano, Forbes Staff - November 12, 2022