If you’ve spent any amount of time around Wall Street, you’ve heard the term “inflection point,” probably muttered with a mix of awe and anticipation. Nobody wants to miss the inflection. Everybody wants to be in position when it hits.
And the reason is rooted in math. The inflection is the moment when a trend reverses direction: down becomes up, up becomes down. In that instant, the rate at which conditions are changing slows to zero . . . and then reaccelerates to what feels like infinite speed. It’s an experience you never forget.
Suddenly a market that can’t catch a break gets a bit of relief. Conventional wisdom cracks. People who were on the right side of the trades find that they’re now upside down. We saw this yesterday. Hedge funds that rely on algorithms to squeeze profit suffered their third-worst day of the year.
Most of them were actively short stocks and bonds alike. They were betting that the Fed would talk tough, earnings season would be lousy and the gloom that pervaded Wall Street in the last few months would only get deeper.
Instead, the Fed essentially shrugged. The job market is showing signs of slack without lurching over a 2008-style cliff. While inflation keeps receding, the economy keeps moving in the wrong direction to signal an imminent recession. If short-term rates haven’t peaked yet, they’re on the edge.
The market responded with a surge of relief. You can see the inflection on chart after chart. The Dow spent the last two weeks of October falling into oversold territory. It was already due a bounce, but the Fed meeting was enough to push it through short-term technical resistance and recover support. Now it can climb as far as it can . . . maybe recapture 35K, maybe even retest the summer peak.
The S&P 500 and the NASDAQ tell a similar story. Even the beleaguered small-cap Russell 2000 and the IPO index have flipped from fumbling for a floor to fairly firm footing. As long as nothing goes horribly wrong in the coming week, they’ll recover support and get back to work too.
What could go wrong? Tensions are already flaring in the Middle East, war in Ukraine is approaching its third year, oil prices are holding $80 a barrel and a lot of people feel miserable. But so much bad news is already priced into the market that even a little relief can be transformational.
Bonds, for example, got so oversold that a bounce was inevitable. While their recovery could falter next week, the Fed has essentially signaled that this is the last chance yield-obsessed investors have to buy short-term paper and lock in much more than 5% for the coming 3-12 months. We’ve seen those yields go DOWN since Powell made his speech. That means demand for this paper is getting a little frenzied.
And as short-term yields go down, money will start tiptoeing back up the yield curve. Believe it or not, long-term bonds will catch a bid again and those rates will stabilize. For now, as long as the healing process unfolds, I doubt we’ll see any fresh shocks from that area of the market. Remember, the Fed has already hit “pause” and the job market has given them room to stay right where they are until the end of the year.
After that, who knows? Meanwhile, earnings across the S&P 500 are tracking a little stronger than expected and guidance for the current quarter suggests that the biggest companies in the world have adjusted to all the challenges stacked against them.
Growth is back. Not a lot of growth, but enough to get the fundamentals moving in the right direction again.
That’s a reversal of direction. A few weeks ago we were still staring at the likelihood that corporate cash flow was still deteriorating. Instead, a wide range of sectors is doing better than those hedge funds expected: consumer companies, banks, Big Tech, even the manufacturers and real estate companies.
It’s not just Amazon (AMZN) and Meta (META). It’s Domino’s Pizza (DPZ), American Airlines (AAL), Allstate (ALL) and on and on and on. While there are always pockets of relative weakness, on the whole Corporate America has learned how to operate in this environment. And after a year on the defensive, it feels good to see corporate cash flow growing again.
And as always, there are companies that are growing a lot faster than the market as a whole. Many are expanding faster than interest rates can pull them back . . . even Apple (AAPL), for all its internal exhaustion, is on track to boost the bottom line 14% in the current quarter compared to last year. Bond yields at 5% aren’t going to make that proposition any less attractive. People aren’t dumping AAPL for bonds yet and I doubt they ever will.
As a general rule, if your “growth” companies aren’t moving the bottom line up 5% right now, you’re probably better off locking in 5% yields until you can find a stock that is actually delivering the earnings expansion you thought you were getting. Likewise, if your “defensive” stocks aren’t paying 5% and there’s no regular pattern of dividend increases, consider letting go.
There are literally thousands of other stocks that can give you one or the other. Focus on them and you’ll do fine, no matter what the broad market indices do.