U.S. stocks finished with modest gains on Friday, 18^th November 2022, but the main U.S. indexes still ended with weekly losses as doubts rose about the staying power of the recent rally sparked by signs of easing U.S. inflation.  

Stocks turned lower earlier in the week after St. Louis Federal Reserve President James Bullard said the central bank’s appropriate target for the federal funds rate will need to be between 5% – 7%, well above the current 3.75%-4% range.  

The Boston Fed’s Susan Collins followed up on Friday that she was not ruling out a 75-basis point rate hike in December.  

The trading volume was muted throughout Friday’s $2.1 trillion options expiration, normally a day when volatility spikes as traders and dealers rebalance their big exposures. 

For the week, the Dow Jones average ended flat, while the S&P 500 dropped 0.7% and the Nasdaq Composite fell 1.6%. 

Here are the closing levels on Friday, 18^th November 2022:

	Last	Change	%Change
Dow Jones	33,745.69.	+199.37.	+0.59%
S&P 500	3,965.34	+18.78.	+0.48%
Nasdaq Comp	11,146.06	+1.10.	+0.01%
US 10Y	3.83%
VIX	23.12	-0.81	-3.38%

Over the weekend, Bloomberg reported Fed’s Bostic Favours Slower Pace of Rate Hikes Ending Near 5%. 

This and the past weeks’ comments from Fed officials, while they may vary, still indicate that the Federal Reserve is not done raising rates. 

The rally we have seen in recent days were on the hope that the Fed will pivot sooner rather than later especially with the better than expected inflation data. 

 
It has been known that sometimes the Fed gives the market what it wants and maybe eventually they might. However, the recent comments from officials still indicate that inflation is still not where they want it to be, and they will do what is necessary to bring it down. 

 
The pause or pullback in the rally could be due to many factors. Whether the comments from Fed officials will weigh on investors or be ignored again will be known very soon. 

 
The desire of the bulls to keep the momentum going and position for a complete turnaround is hard to fight. There is just so much buying power out there that have scared away so many shorts. 

 
However, it would be best to keep in mind that the inversion of the curve, specifically the 2s 10s spread, is calling for a recession. I’m not sure how much of a rally we will see if a recession is at the back of people’s minds.  

Source: CBOE, Bloomberg

This commentary is written by James Gomes
James has been in the finance industry for over 30 years and most recently worked for a large U.S. bank for more than 20 years.

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