The 'Pivot Is Coming'

By Alex Eule  |  Monday, October 3

A Fresh Start. After three terrible quarters for stocks, during which the S&P 500 fell 25%, investors opened the final quarter of the year with a new sense of optimism. Whether it lasts more than a day is an open question, though, and there are reasons for doubt. 

The S&P 500 jumped 2.6% on the day, for its best session since late July. The Dow Jones Industrial Average and Nasdaq Composite also enjoyed 2%-plus gains. As has been the pattern of late, the gains were coupled with big declines in bond yields. The 10-year Treasury yield fell 15 basis points to 3.65%, while the 2-year yield was down 10 basis points to 4.10%.

The drop in yields was tied in part to softer manufacturing data from the Institute for Supply Management, which reported that growth in the sector slowed in September. Meanwhile, its "new order index" actually contracted on the month. That could spell problems for the economy, but it could also help to alleviate some of the inflationary pressures that continue to worry the Federal Reserve.  

Investors, for their part, are finding renewed hope that the Fed is moving closer to the end of its interest rate hikes and getting ready to pivot to a less restrictive monetary policy. It's not the first time that optimism about rates has sent stocks higher. A hoped-for pivot over the summer sent stocks soaring before new inflation data and more hawkish commentary from Fed officials suggested the hikes still had a while to go. 

But the futures market is now pricing in a peak Fed Funds rate of 4.25% to 4.5%, which is less than the 4.6% median forecast from Fed officials at their meeting just two weeks ago.

"The Fed is not going to ignore housing market collapse, U.S. growth slowdown, USD[ollar] appreciation pain to key U.S. geopolitical allies, and a potentially calamitous bond market carnage forever," Marko Papic, chief strategist at the Clocktower Group, wrote today. "A pivot is coming."

If he's right, stocks could be ready to rally. But wishful thinking around rate moves has gotten investors in trouble multiple times this year. The commentary from Fed chair Jerome Powell suggests he's nowhere near a pivot. At some point, investors might want to just take him at his word.

DJIA: +2.66% to 29,490.89
S&P 500: +2.59% to 3,678.43
Nasdaq: +2.27% to 10,815.43

The Hot Stock: Marathon Oil +10.6%
The Biggest Loser: Tesla -8.6%  

Best Sector: Energy +5.7%
Worst Sector: Consumer Discretionary +0.1%