Stock market bulls are regaining control, and only inflation stands in their way

That is The Takeaway from in the present day’s Morning Temporary, which you’ll be able to join to obtain in your inbox each morning together with:

The Dow Industrial Common (^DJI), Nasdaq Composite (^IXIC), and S&P 500 (^GSPC) prolonged their successful streaks to 4 days on Wednesday, leaving the key US inventory indexes broadly constructive after two disappointing months of losses.

On the finish of July, the Nasdaq was sitting on positive factors nearing 40%, returns that few, if any, buyers anticipated initially of 2023.

However the months of August and September are well-known by buyers as seasonally weaker intervals for the inventory market. And this 12 months proved no exception.

And with markets appearing higher and Wall Road searching for the potential finish of a three-quarter earnings recession, the bulls are reasserting management.

The September Shopper Worth Index (CPI) report out Thursday morning might simply put a fork within the fledgling inventory market rally with an upside shock within the headline quantity.

If Thursday’s CPI report suggests the Fed has not been capable of comprise inflation, that might problem the present bull market. As we mentioned final week, the bond market is within the midst of a bear steepener that tends to finish in tears — and a super-hot CPI print may very well be that catalyst.

JPMorgan is anticipating the headline month-over-month CPI quantity to return in on the Road’s consensus of 0.3% or beneath, which might be bullish for shares.

The funding financial institution continues to be inserting ~5% odds on a month-over-month quantity that is available in above 0.6%, and 27.5% odds we see inflation rise between 0.4% and 0.6% from the prior month.

In both of these two instances, JPMorgan expects shares to tumble as buyers brace for extra forceful motion from the Fed.

WASHINGTON, DC - SEPTEMBER 28: Federal Reserve Board Chairman Jerome Powell (C) speaks as Senior Public Communications Strategist at Federal Reserve Robin Cappetto (L) and Director of Economic Education at Federal Reserve Bank of Richmond Sarah Gunn (R) listen during a teacher town hall meeting at the Federal Reserve on September 28, 2023 in Washington, DC. The Federal Reserve hosted the event with educators from the Richmond Federal Reserve district to discuss the economy. (Photo by Alex Wong/Getty Images)

Fed Chair Jerome Powell (C) speaks at a instructor city corridor assembly on the Federal Reserve on Sept. 28, 2023, in Washington, D.C. (Alex Wong/Getty Photos)

However away from any sudden headlines or shifts within the economic system, seasonal traits are actually shifting from bearish to bullish into year-end, offering a strong tailwind for shares.

As we identified initially of August, the CBOE Volatility Index (^VIX) has entered a seasonally bullish interval that historical past suggests will final into mid-October. All else equal, a rising VIX is dangerous for shares.

Now, traditionally, the VIX tends to peak twice in October, then development downwards into the tip of the 12 months. That first peak is formally within the rearview mirror as of in the present day.

And though the market’s rally to start out the 12 months got here as a shock to many, knowledge we explored again in July painted a rosy image for buyers. As we famous again in the summertime, solely the Black Monday crash of 1987 stopped the S&P 500 from rising over the 12 months’s closing 5 months after a ten% acquire via July.

Barring a equally dramatic flip for this market, October’s buying and selling motion suggests historical past would possibly stay on the aspect of the bulls as soon as once more.

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