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Volatility May Continue Despite the Rally Earlier This Week: Market Commentary from Cabana’s CEO – October 7, 2022

2 years ago

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Last week, we discussed the probability of a relief rally in stocks. At that time, the major equity indices were deeply oversold, as was the bond market. For reference, stocks were down between 8% and 10% during September, depending on the index. This followed a 4% or more loss in August. Bond yields marched higher as well, with the 10-year Treasury note touching 4% last week. This has resulted in bond prices falling as quickly as equities over the past few weeks. The “nowhere to hide” phenomenon that we have seen this year has again been on full display. As I have suggested since this bear market began in January, it seems to me the bond market has been driving this train and the bounce in stocks over the past few days has again coincided with a pullback in bond yields and a bounce in bond prices. 

 
The impetus for this “relief rally” appears to be both the Bank of England and Australia’s central bank backing off of their respective aggressive inflation fighting rhetoric and, in the case of Australia, hiking 25 basis points instead of the assumed 50. The dovish change comes as both countries are grappling with potential systemic risk to their economy and imminent recession. I discussed this last week in relation to the impact of a soaring dollar on other economies. Here in the U.S., our central bank is standing firm on its mission to bring inflation back to a 2% target, no matter the cost. So now we are all getting mixed messages and that is typically problematic. 

 
All in all, in my opinion nothing has changed over the past week beyond a much anticipated and swift bear market rally, which has already met some resistance. Both the S&P 500 and Nasdaq notched new closing lows last week and those will likely need to be tested at some point before any type of stable bottom in equities can be established. During the interim, I expect volatility in both stocks and bonds to continue. October has provided some scary volatility over the years. I wasn’t alive in October 1929 when the market crashed and on Black Monday, which was October 19, 1987, I was focused on college life, but I was in this business in October 2008 in the aftermath of the Lehman Brothers collapse. I’m not suggesting a crisis of those magnitudes is waiting in the wings, but it does feel to me like anything is possible in the current environment. 

Disclaimers

January 17, 2024

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The Nasdaq Composite Index is a market-weight capitalization index that covers more than 3,000 stocks listed on the Nasdaq Stock Market. What is the Nasdaq Composite, and What Companies are in It? | Nasdaq