Can The Stock Market Rally Last?

By November 21, 2015Risk-Reward Insights
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The S&P 500 shot 8.3% higher in October, making it the fifth best October performance since 1950. When October delivers a positive return for the S&P 500, so does November (78% of the time). Is it possible that the S&P 500 continues its rally through the end of the year? Of course. A volatile market is the most likely scenario, but anything is possible in the near term. What matters more is what’s going to happen when the fundamentals play out.

Fed Dilemma
The first real challenge for the market should come in December because the odds of a rate hike are 40%. If the Federal Reserve pulls the trigger, then borrowing costs increase and debts become more difficult to service and repay. In actuality, this will be a tiny move, but the perception of continuing rate hikes is what will have the potential to move markets. If Janet Yellen moves, expect it to be accompanied by dovish language, leaving the door open for a move back down if it doesn’t work. (For more, see: Understanding Janet Yellen’s Role on Interest Rates.)

If the Federal Reserve doesn’t move, then a certain narrative continues and builds momentum, which is that underlying economic conditions must be worse than previously advertised. Bad news has been good news in recent years, but now that we’re nearing peak liquidity, bad news might actually be bad news for stocks.

Highly Leveraged
Ben Bernanke might believe he saved the economy, and perhaps that’s true from a very short-term perspective. His policies are the reason we moved to prolong record-low interest rates, which kicked the can down the road by allowing for cheap money to move through the economy. This allowed inefficient companies to survive by taking on more debt. In the end, these companies will eventually fail, which will lead to falling stock prices and layoffs, the latter of which will negatively impact consumer spending.

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