Wall Street rally brings out bulls, who some fear may be “suckers”

Wall Street’s improbable summer rally has given way to scattershot yet bullish early August momentum. Still, a growing number of analysts are cautioning investors against chasing what may be a classic “suckers’ rally.

Driving the news: Tentative signs that inflation is moderating has fanned hopes of a soft economic landing, even as the Federal Reserve shows no signs of relenting on its tightening campaign.

  • And soaring blue-chip and technology shares, which on Friday closed out their fourth consecutive week of gains, have fed speculation that a new bull market is taking hold.

Details: On Wednesday, the Nasdaq closed at levels 20% above the lows hit in June, satisfying the criteria for an (upward) correction before giving back some of those gains.

  • Wall Street’s “fear index” is currently trading well below its 52-week peak, set when rate hike fears hit a crescendo.
  • Meanwhile, a survey of investors by JPMorgan found that 44% are planning to ramp up their exposure to stocks, and 54% plan to cut their bond allocations.

The intrigue: A whopping 64% of investors don’t believe the U.S. is in a recession, the data showed, a contrast to the 62% of all Americans who think it is.

Why it matters: The Fed’s moves to tame inflation come as the economy is sending decidedly mixed signals about growth. Markets have been whipsawed by monetary tightening, but have recently priced in the possibility that faltering growth could nudge the central bank into an easing campaign — something Fed officials have openly dismissed.

  • Meanwhile, investors have cheered this week’s data, suggesting inflation could be cooling, which could eventually prompt the Fed to pivot… maybe.

Yields on Treasury debt initially spiked in response to inflation fears, but have retreated lately in the face of slowing growth. On Thursday, short-term interest rates briefly rose above their longer-dated counterparts, a reliable (yet imprecise) signal of a looming recession. So who’s right, stocks or bonds?

What they’re saying: Alas, the rebound appears to be “an impressive rally in what is still a bear market,” David Donabedian, CIO at CIBC Wealth Management, tells Axios. “Wildly oversold” risk assets are seeing a temporary snapback that’s unlikely to last, he added, especially with the Fed still in tightening mode.

  • Nicholas Colas, co-founder of DataTrek Research, wrote on Thursday that “we still like stocks but worry the current rally is overdone.”

What we’re watching: Whether gnawing recession fears indeed force the Fed into a pivot, which after last month’s white-hot job creation appears unlikely but not impossible.

  • “The bond market seems to be saying that there is no free lunch,” wrote Katie Nixon, CIO for Northern Trust Wealth Management in a recent blog post. “The labor market will give the Fed the green light to press on, but the cost will be slower growth.”
  • And CIBC’s Donabedian warns that “inflation can be murdered … but you need a serious weapon to do it,” he said, alluding to higher rates.