The Risk-On Rebound May Be Stalling Out

Recent lower-than-expected inflation reports and a weaker U.S. dollar have set the markets up for a robust bear market rally since the mid-October lows. As the S&P 500 inches towards the 200-day moving average, the risk on rebound in the markets may have stalled following quite a good run over the last month.

The consumer is still healthy after retail sales impressed in October, rising by 1.3%, higher than the 1% consensus expectation. As to be expected, the NAHB housing market index tumbled to a decade low as high interest rates continue to pressure housing. Many challenges remain for the housing market, and further disinflation is likely ahead.

A weaker housing market while the labor market remains resilient may be a concern for the central bank as it further raises rates in the months ahead. The latter remains the reason why many at the Fed support such moves, as it increases the possibility of inflation remaining stubborn on the way back down. The consensus remains that the Fed will raise rates by 0.5 percentage points, which would end a run of four consecutive 0.75 percentage point increases.

Due the conditions that monetary policy operates on—a variable lagged basis—the economy is about to feel the real impact of restrictive territory. With that in mind, a case can be made that markets are getting ahead of themselves, and the bear market rally may be coming to an end.

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