The tremendous rally in the stock market in recent weeks has left many observers puzzled as to what prompted the sudden surge. Despite being in the midst of earnings season and the ongoing Federal Reserve activity, there wasn’t a clear trigger for the rally. A lack of information from the Fed during the market’s bottoming process only added to the mystery. However, as is often the case with major moves in the market, the rally seemed to defy conventional expectations and logic.
The rally was particularly unexpected because, in the earlier part of October, the market was grappling with a supply-and-demand problem related to Treasurys. Additionally, funds were heavily invested in bonds and faced inflationary pressures, leading to a significant downturn. The conventional relationship between stocks and bonds suggested that the market would continue to decline, but this didn’t materialize, as rates did not reach the predicted 6% level.
Earnings season didn’t provide any clear signals for the rally either, as the performance of major companies such as Tesla, Microsoft, Alphabet, Amazon, and Apple were mixed. Furthermore, macroeconomic data failed to anticipate the rally until after it began. However, a closer examination of the underlying factors that contributed to the rally reveals two important developments.
First, a Treasury announcement regarding the refunding schedule for 2024 indicated a lighter issue of long-term debt than expected. This revelation, coupled with a lower-than-expected job creation figure reported by the Labor Department, confirmed the rally that had begun on October 28th. This rally was also supported by the market’s oversold position, a critical indicator that correctly anticipated the turnaround.
It is worth noting that the rally also caught many investors off guard, especially as it coincided with extensive bond-market gains and a persistent stock market uptrend. By taking advantage of the oversold market conditions, smart buyers quietly started picking up stocks, including those offered in abundance by hedge funds. This shrewd buying ultimately defined the market’s bottom and set the stage for the ongoing rally.
Moving forward, the sustainability of the rally may depend on factors such as the supply of stock through IPOs and the performance of the bond market. The unexpected nature of the rally and the manner in which it was sparked serves as a critical lesson about the dynamics of the market. With no clear signs of a downturn, the rally seems poised to continue for the time being.
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