U.S. stocks closed higher on Friday, 21st October 2022 to score the biggest weekly gain since June.
Friday’s rally ended another volatile week as prices swung from positive to negative and back to positive throughout the week. The resignation of the UK prime minister, Jobless claims, and company earnings caused large swings throughout the week.
Ultimately, it was comments from Federal Reserve Bank of San Francisco President Mary Daly that set the course for a week ending rally.
Daly said that policymakers should start planning for a reduction in the size of interest-rate increases, though it’s not yet time to “step down” from large hikes.
“It should at least be something we’re considering at this point, but the data haven’t been cooperating,”
A slowdown to more incremental increases of 50 or 25 basis points will be appropriate as the Fed’s benchmark rate gets closer to its terminal level for this hiking cycle, Daly said.
The comments resulted in a pullback in yields from its new highs and stocks took their cue to force shorts to cover and FOMO to come in again.
S&P 500 ended up a solid 4.8% for the week, The Dow Jones rising 4.9%, and the Nasdaq Composite jumped 5.2%.
Here are the closing levels on Friday, 21st October 2022.
What a week it has been. It looked like both buyers and sellers had it rough, ultimately the buyers took control to end the week on a high note.
The takeaway from last week’s trading was that anything can happen. When it looked like it was time to buy, it fell and when it looked like it was going lower it rallied.
The higher close tells us that investors are looking for reasons to buy and Mary Daly gave them what they wished for.
If you read closely what was said, it did not change very much, the path of the Fed. They are still anticipated to hike 75 basis points in the next 2 meetings and probably 50 in the one after that.
But that is not what the market read. It focused on the words like “reduction in the size of interest rate increases”, and “a slowdown to more incremental increases”.
These actions are a given and will happen at some stage. Nobody thinks that the Fed will hike forever.
The Fed will reduce its hikes and slow down once it reaches a level that the Fed believes is enough to curb inflation. The terminal rate has been predicted to be as high as 5% by some analysts. We are not nearly there yet.
However, bulls feel like they can see the light at the end of the tunnel and that now is the time to start building back longs. Are they right? Maybe, maybe not.
Just remember the saying, the market can stay irrational longer than you can stay solvent.
There is still a long way till the Fed meeting so I would not be surprised if the markets remain volatile over the next few weeks.
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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