Stock Market Gains May Look Good, but We’re Not Out of the Woods Yet

Stock indexes are still in a “death cross,” which means their 200-day moving averages are above their 50-day averages.


Angela Weiss/AFP via Getty Images

The stock market’s gain sure feels encouraging, but the market isn’t out of the woods yet. A few hurdles remain. 

First, the good news. The S&P 500 has gained 16% from its lowest close of the year in mid-June, while the Nasdaq Composite has gained 22% and the Russell 2000 is up 20%.

The gains have come as hopes of peak inflation have become more validated, which means the Federal Reserve could slow down the pace of interest rate hikes. Better-than-feared earnings have also helped. 

The rally has brought the indexes above key levels, adding to the optimism on Wall Street. The S&P 500 is now a touch above 4200, a level it could not reach earlier this year, when sellers came in to knock the index lower. Now, some of those sellers are staying away.

Getting above that level also means the index has bucked part of its larger downtrend this year. It also brings the index above its 50-day moving average of around 3950, signifying that market participants are now more comfortable buying stocks at prices higher than their recent trends. All three indexes are above their 50-day moving averages. 

But while the market is in a healthier place now, it still has more ground to make up before anyone can do a victory lap.

The indexes are still in a “death cross,” which means their 200-day moving averages are above their 50-day averages. Normally, the 50-day average is higher than the 200-day because, in a rising market, the 200-day encapsulates lower prices from a long time ago.

Right now, a 200-day moving average that is higher signifies that stock prices were higher a long time ago as the market has since plummeted. That means investor confidence is still low and that the market has a lot of ground to recover to exit death cross status. 

Getting there starts with the Fed’s Jackson Hole meeting late this month. The market would like to see confirmation that it does intend to slow down the pace of rate hikes. That is not a sure bet right now.

“The Fed is data dependent but will want to see more data before pivoting policy,” wrote Mark Haefele, chief investment officer of global wealth management at



UBS
.

“We continue to recommend a relatively cautious approach [to stocks].”

Perhaps just as pressing is whether the economy will start to feel the pain of already-higher rates. It often takes a few months for higher rates to cause consumers to pull back on spending, so the full impact may not have been seen yet. 

“The bear case from now to year end is that the lagged impact of rate hikes— which will likely take at least nine months to fully hit the economy—causes recession fears to spike and earnings expectations to move materially lower,” wrote Chris Senyek, chief investment strategist at Wolfe Research. 

That makes economic data and earnings over the coming months important to monitor. The Purchasing Managers Index, for example, measures the degree to which businesses are preparing for higher demand—and it has been posting readings of 52 recently, below the near 58 seen to start this year. Markets need to see that any further declines won’t be so steep.

More declines could be consistent with further drops in earnings estimates. The aggregate 2023 earning per share estimate for S&P 500 companies has been revised almost 3% lower in the last few months, according to FactSet. More downward revisions could be on the way. 

At the very least, the stock market will be choppy moving forward. 

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com

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