By Geoffrey Smith
Investing.com — U.S. stock markets opened the week at new record highs, building on the confidence given by a third-quarter earnings season that for the most part has seen companies continue to churn out cash as the global economic recovery from the pandemic continues.
By 9:45 AM ET (1345 GMT), the was up 157 points, or 0.4%, at 35,977 points, having earlier traded above 36,000 for the first time. The Dow was outperforming the two other main indices, as the and the Nasdaq Compositve notched a gain of only 0.2% each.
The moves come at the start of a week likely to be dominated – both in the U.S. and further afield – by central banks. The Federal Reserve is widely expected to announce the phase out of its $120 billion in monthly bond purchases on Wednesday, while the central banks of Australia and the U.K. are also both expected to tighten policy at their meetings. Analysts at Goldman Sachs (NYSE:) said over the weekend that they now expect the Fed to start raising interest rates as early as July next year, a year earlier than they had previously expected.
Similar shifts in expectations have driven two-year bond yields to their highest in 20 months, creating a flatter yield curve that typically signals an economic slowdown ahead. However, the continued momentum of many cyclical stocks, illustrated again on Monday by the Dow’s outperformance, has once again underlined that the post-pandemic recovery is not a typical business cycle.
“The Fed is walking a fine line,” wrote Allianz (DE:) Global Investors chief investment officer for fixed-income Franck Dixmier in a note to clients. “The risk of the Fed making a monetary policy mistake is growing. Lifting rates too early, when inflation would eventually prove to be temporary, would put the recovery at risk, but acting too late would ultimately see the Fed forced to raise rates more than necessary.”
Cyclicals were benefiting at the expense of megacap tech names in early trading, with Apple (NASDAQ:) stock, Amazon (NASDAQ:) stock and even Alphabet (NASDAQ:) stock falling by over 1% each. While the first two had produced underwhelming numbers last week for the three months through September, Alphabet had soundly beaten expectations thanks to sustained growth in advertising revenue.
Electric vehicle makers also performed strongly, with Lucid (NASDAQ:) stock rising another 2.2% at the start of a week when it expects to make its first customer deliveries. Tesla (NASDAQ:) stock rose 1.2%, underpinned by news of a long-term supply deal for lithium products, from Chinese supplier Gangfeng Lithium, while Xpeng (NYSE:) ADRs rose 3.1% to test a nine-month high after posting a sharp rise in year-on-year deliveries in October.
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Morgan Stanley: bear market rally to continue
One of Wall Street’s best-known bears, Michael Wilson, thinks the S&P 500 will rise another 7% before turning down, so the bear market rally will continue for now, writes Market Watch.
After the Dow Jones, S&P 500 and Nasdaq Composite joined their strongest weekly gains since at least May last Friday, Wilson, who is chief strategist and head of U.S. equity markets at Morgan Stanley (NYSE:MS), told clients that there could be another 5% to 7% before the downward trajectory of U.S. stocks resumes during the latest bear market recovery.
Wilson has held a bearish view of the stock market for about 2 years and correctly predicted a sell-off this year.
Wilson explained in a research note sent out to clients on Monday that a pullback in the 38-50% drop in the stock market this year “would not seem like something unnatural, not consistent with the previous bear market rally.”
While growth concerns have triggered a sell-off in commodities and lowered inflation expectations, the fact that the U.S. economy is already slowing and heading toward recession means that any market rally is likely to be short-lived, and U.S. stocks are likely to eventually fall.
Wilson mentioned in the note that the bear market is not over yet, although it may appear otherwise in the next few weeks as the market takes the rate cut as a sign that the Fed can still manage a “soft landing” and prevent a meaningful revision to earnings forecasts.
U.S. stocks rose last week as investors now hope the slowing economy and falling commodity prices may inspire the Fed to raise interest rates less sharply. Federal funds futures, a derivative used by investors to bet on the pace of the Fed’s monetary policy changes, estimate with a high probability that the Fed will be forced to start cutting interest rates again as soon as next summer.
They also consider the lower peak in the federal funds rate: it will peak around 3.5% at the end of 2022 instead of 3.75% just a couple of weeks ago. Wilson also pointed out the drop in Treasury yields: the 10-year Treasury bond yield went from 3.230% to a low of 3.07% on Friday before rebonding again on Monday.
Wilson expects the S&P 500 index to fall to around 3,400 points if the U.S. Federal Reserve manages to get a “soft landing” for the economy — which Fed Chairman Jerome Powell said last week would be “a very difficult thing to do.”
Wilson expects that if the U.S. economy plunges into recession, the S&P 500 index will fall to around 3,000 points. In any case, Wilson believes that U.S. stocks are still highly valued because the risk premium — that is, the measure of compensation that investors receive for the extra risk of owning stocks instead of bonds — remains about 300 basis points higher than the 10-year Treasury bond yield, which is considered a “risk-free rate.”
Easing chip shortages to help Volkswagen in H2 – CEO
© Reuters. FILE PHOTO: Volkswagen logo is pictured at the 2022 New York International Auto Show, in Manhattan, New York City, U.S., April 13, 2022. REUTERS/Brendan McDermid/File Photo
BERLIN (Reuters) – Volkswagen (ETR:VOWG_p) sees a strong second half of 2022 and expects progress in catching up with rival Tesla (NASDAQ:TSLA) as easing chip shortages start to offset supply chain bottlenecks and rising costs, the carmaker’s CEO said on Tuesday.
“We are earning more than ever,” Chief Executive Herbert Diess said at a works meeting, adding Volkswagen is ramping up electric vehicle volumes in its biggest markets in Germany and China thanks to easing semiconductor shortages.
This should allow the carmaker to narrow the Volkswagen-Tesla gap this year and meet its goal of becoming market leader by 2025 if it seizes the moment while the U.S. electric car maker burns cash on large investments, the CEO said.
“Elon (Musk) has to ramp up two highly complex factories in Austin and Gruenheide at the same time – as well as expand production in Shanghai. That’s going to take strength out of him,” Diess said.
Reliance Chairman Mukesh Ambani steps down as director of telecom arm
© Reuters. FILE PHOTO: Mukesh Ambani, Chairman and Managing Director of Reliance Industries, arrives to address the company’s annual general meeting in Mumbai, India July 5, 2018. REUTERS/Francis Mascarenhas
BENGALURU (Reuters) – Reliance Industries Chairman Mukesh Ambani has stepped down as director of Reliance Jio Infocomm Ltd, the conglomerate’s telecom arm said on Tuesday.
Reliance Jio said https://refini.tv/3Nrs773 it has appointed Mukesh’s son and non-executive director Akash Ambani as the chairman of its board. Akash has been involved with the telecom unit since its launch in late 2016, where he started as a director.
India’s telecoms sector had been upended after the entry of Jio, which triggered a price war that forced some rivals out of the market and turned profits into losses.
Jio, which started out offering mobile teleservices, has been aggressively investing in services like internet broadband and forging ties with handset makers to launch low-cost smartphones and providing 5G services.
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