Markets Rally on Hopes for Fed Pause, Earnings Have Been Mixed

Markets had their best day since June in a furious rally that was led by Materials, Financials and Technology. This was the third positive week in a row, and the first three-week winning stretch all year. A Wall Street Journal article by Nick Timiraos renewed hopes that the Fed would back-off from its Old Testament approach to fighting inflation. Our Head of Research, Tom Lee, has been ahead of the curve on this issue, and has been suggesting all week that the reaction function to the Fed would be changing as a pause came into view. Remember, markets are forward discounting machines, and the stock price is a leading indicator. So sometimes when you get through the eye of a storm, markets can see through risks. Our data science team has been analyzing sentiment data and it has been persistently terrible. Recent readings have ranked with some of the worst in the history of the AAII survey.

As you can see, when sentiment is this persistently bad, the forward returns have been positive historically. So, sentiment is a feather in the bull’s cap, to be sure. However, the tightening financial conditions that have already started raining fire and brimstone in the housing market will be meandering their way through the rest of the economy in due co...