Inventory market retains rallying though customers really feel awful

New York
CNN Enterprise
 — 

Shoppers could also be frightened about inflation and rising rates of interest. However don’t inform that to Wall Road.

Shares rose once more Tuesday, placing the market on observe for a third-straight day of positive factors in what’s turning out to be a really bullish October. The Dow was up practically 275 factors, or 0.9%, in noon buying and selling. The blue chips have now rallied greater than 10% to date this month.

The S&P 500 and Nasdaq have been additionally sporting stable positive factors Tuesday, rising 1.3% and 1.8% respectively.

So why is the market in rally mode though customers are frightened in regards to the rising worth of nearly every little thing? There are two key causes.

For one, earnings are nonetheless fairly good. GM

(GM), Coca-Cola

(KO) and UPS

(UPS) have been a number of of the long-lasting American firms to report sturdy earnings and gross sales for the third quarter on Tuesday. So though customers and companies could really feel awful each time they purchase one thing and see how a lot it prices…they’re nonetheless spending.

Till sagging client confidence and excessive inflation really damage demand, then company earnings…and due to this fact shares…could maintain up.

There’s one other issue at play, too, and one which’s a little bit extra counterintuitive. The relentless drumbeat of scary financial information — housing slowdown headlines, inflation fears, geopolitical worries and recession jitters — could lead the Federal Reserve to pull again on its tempo of rate of interest hikes.

Traders are hoping that’s true as a result of they’re frightened that overly aggressive charge will increase by the central financial institution will ship the economic system right into a deep and extended recession.

The Fed has raised charges by three-quarters of a proportion level at every of its final three conferences in its battle towards inflation, and the central financial institution is broadly anticipated to take action once more at its subsequent assembly on Wednesday, Nov. 2. However after that, all bets are off.

And though Wall Road expects the nation’s gross home product, the broadest measure of the economic system, to have grown within the third quarter when the information is launched on Thursday, recession alarm bells proceed to ring.

The housing market is beginning to pull again as mortgage charges have spiked. Manufacturing development has slowed. CEOs are nervous about extra laws in Washington hurting development. And rising vitality costs may put a crimp in client demand.

That’s why there are rising hopes that, if the economic system begins to indicate extra indicators of weak spot AND inflation lastly cools off a bit, the Fed could increase charges by solely a half-point in December.

What’s extra, the Fed may hit pause on elevating charges additional in 2023 because it waits to see what affect present charge hikes are having on the economic system. Some on Wall Road are even betting the Fed could reverse course and begin reducing charges once more later subsequent 12 months if it seems the speed hikes went too far and despatched the economic system into recession.

It could seem that buyers are enjoying the lengthy sport. Shares have already plunged in 2022, in anticipation of the rising charge setting and a potential financial and earnings slowdown this 12 months and within the first half of 2023.

But when the worst of the fallout from inflation and charge hikes is actually over by the second half of subsequent 12 months, then it is smart for Wall Road to wager on that now. The well-known saying about Wall Road is that markets are ahead trying.

So though customers could also be dwelling on what definitely appears like a dismal financial setting at the moment, buyers are already banking on (hopefully) happier occasions forward in late 2023 and 2024.