Coming off September 2022, the worst month since March 2020, and the third consecutive quarterly decline, the U.S. stock market began October positively.
On Monday and Tuesday, the S&P 500 gained 2.6% and 3.1%, recouping some of its 9.3% loss in September. The Dow Jones Industrial Average and the tech-heavy Nasdaq Composite Index began the month with similar gains, fueling cautious optimism for a year-end rebound.
Ironically, this week’s rally was likely fueled by “bad” news. The problems at Credit Suisse, slower-than-expected manufacturing growth, and a decline in construction spending have fueled expectations that the Fed will be less aggressive than anticipated in future rate hikes. On September 29, according to the CME FedWatch Tool, the probability of another 75 basis point raise on November 2 decreased from 73% to 53%. Although it has since increased to 69 percent, investors are losing faith that the Fed will continue to be as aggressive in its efforts to control inflation.
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As the accompanying graphic demonstrates, the stock market is now on track for its worst year since 2008. As a result, investors could use a sustained rise to close the year. According to macrotrends.net, the S&P 500 has only had a year-end decline of more than 20% twice in the twenty-first century: in 2002 and 2008. Even in 2020, when the COVID-19 outbreak wreaked havoc on the markets, the rebound was fast, and the stock market rose for most of the year’s second half.
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