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Be positive but careful about this stock market bounce back

Peter Switzer
31 October 2022

Our stock market is in for a great day today, taking its lead from a strong Friday on Wall Street. While I’m really happy to see the kind of bounceback for stocks which is what I expected to see, there won’t be any champagne-popping at Switzer until we see a raft of data here and especially in the US over this week and next.

Until we bed down the unequivocal news that US inflation is dropping, stock markets are vulnerable to another sell-off.

Before giving you the inflation form guide to do your homework to pick some stock market winners, let’s recap why optimism has returned to share markets over the past week in particular.

That optimism is so strong that the Dow Jones Index has risen four weeks in a row and is looking at an historic achievement, such that our market is expected to open up 93 points higher at the start of trade today. “On a weekly basis, the major indexes made notable gains,” CNBC reported. “It was the fourth positive week in a row for the Dow, a first since a five-week streak ending in November 2021. The 30-stock index is up 5.7% this week in its best performance since May. It’s also on track for its best month since January 1976!” (That’s my “!” but it’s certainly deserved.)

This US enthusiasm has helped our S&P/ASX 200 over the past month, as the chart below shows.

S&P/ASX 200

We’ve risen a nice 5% in a month, while the Dow is up 14%. The S&P 500 has spiked 8.8% and part of the reason for that is that tech stocks are yet to take-off. Old-fashioned, real businesses that make profit are more in favour at this early stage of the stocks comeback.

So why is this happening?

Well, first of all, recession fears have been hosed down by some good economic data and better-than-expected company reporting of revenue and profit. But the real winner has been economic data that suggests inflation in the US is starting to slide. And that makes this Friday’s job report crucial to keeping optimism on the rise.

The Yanks need to see a poor job creation number and rising unemployment to keep Wall Street positive. Also there will be a 0.75% rise in the US official rate from the Fed early this week, but it will be the commentary that goes with that highly-expected rate rise that will either help or hurt stocks.

Next week on November 10 the US gets the latest Consumer Price Index (CPI), which needs to show that inflation is falling. If it does, these recent rises will be built upon. If it doesn’t, stocks will slide again. That’s why I’m hesitant to ‘punt’ that this stock market bounceback is sustainable for the short term. By the way, even if there is a fall out there waiting to happen, we at least have been given a great sneak preview of what will happen when inflation really falls.

Locally, our market will be affected by what the RBA does with rates on Cup Day, when a 0.5% rise is now being predicted by some economists. While that will be important, the main game is US inflation and what the market sees between November 1 and November 10.

Fingers crossed the market has had an accurate premonition on what’s happening to inflation in the USA.

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