Stocks start October with a huge rally

New York
CNN Business

The stock market started in October more of a treat than a trick for investors. The market rebounded in the fourth quarter despite growing concerns about the financial health of European banking giant Credit Suisse and weak economic data.

The Dow rose nearly 900 points, or 3.1%, in afternoon trade. It is on track for its biggest gain since November 2020. The Nasdaq and S&P 500 rose 2.7% and 3%, respectively. The stock market ended September (and the third quarter) with a loud roar on Friday.

All but one of the Dow’s 30 stocks were higher at midday Monday, signaling a volatile market — they were all lower on Friday. (Johnson & Johnson (JNJ) lagged wages on Monday.) Investors are increasingly worried about inflation and that aggressive rate hikes by the Federal Reserve to rein in soaring prices could eventually tip the economy into recession.

Stocks are still down sharply this year. The CNN Business Fear and Greed Index, a seven-measure measure of investor sentiment, remains at extreme fear levels. But Monday’s market rally may have been a perverse “bad news is good news” rally.

Concerns about rising pressure on Credit Suisse (CS) could lead the Fed to slow the pace of rate hikes. Bond market investors also appear to be betting on this. The benchmark 10-year U.S. Treasury yield, which topped 4 percent last week, has slipped in recent days and fell again on Monday to around 3.66 percent.

Of course, inflation remains an issue. But if the Fed and other central banks now also have to worry about how troubled European banks could lead to further financial contagion, this may not be the best time to continue raising interest rates by historic levels.

Just a week ago, traders were pricing in a more than 70 percent chance that the Fed would raise interest rates by three-quarters of a percentage point for the fourth straight time at its Nov. 2 meeting. The odds of a rate hike of that magnitude have now fallen to around 50%, as the odds of a slightly smaller rate hike have increased.

The latest U.S. manufacturing data could also give the Fed a reason to reconsider how much it should raise interest rates.

The Institute for Supply Management, a nonprofit economic association, reported that its influential manufacturing index fell from August, below Wall Street forecasts. This could indicate that the Fed’s rate hikes have had the desired effect of slowing the economy and lowering inflation.

“The economy is slowing — a reality that’s increasingly evident in manufacturing. The good news is that there are signs that prices are stabilizing,” Jim Baird, chief investment officer at Plante Moran Financial Advisors, said in a note on Monday.

The surge in oil prices, while unwelcome news for consumers, also boosted energy stocks on Monday.

Chevron (CVX) was the top performer in the Dow, and the energy sector was the top performer in the S&P 500. Oil stocks got a boost after reports that OPEC+ oil producers were considering output cuts in an attempt to reverse the coronavirus situation. Crude oil prices have fallen sharply recently.

Investors were also comforted by a rebound in the pound, which recently fell to record lows against the dollar after the new British government abandoned a controversial tax cut plan for the wealthiest Britons.

A stronger pound could ease concerns about soaring UK bond yields and rising credit costs.

In corporate news, Tesla (TSLA) was one of the few stocks not participating in Monday’s rally. Shares of Elon Musk’s electric vehicle giant fell more than 7%, making the company the worst performer on the S&P 500 after it reported disappointing third-quarter delivery and production numbers over the weekend.

Meanwhile, Tesla rival General Motors (GM) rose after reporting stronger-than-expected third-quarter sales.

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