Wall Street: Fabulous recovery rally

US inflation eased somewhat in October. That doesn’t mean that there is no more inflation — but Wall Street investors care little about that in the short term. They euphorically received “the positive news” on Thursday and grabbed risky securities like they hadn’t in a long time.

Because of euphoria: Huge price gains

In this context, the S&P 500 index rose by 5.5 percent, the technology-heavy Nasdaq Composite by an incredible 7.4 percent, the yield on ten-year government bonds has fallen significantly and the dollar has gained more than two percent against the Swiss franc over the course of the day lost.

While experts are warning of a hard landing for the American economy, pointing out that consumers are less willing to spend due to depleted savings, citing increasing credit card debt and falling real estate prices and fearing the full impact of monetary tightening in the coming months, speculative investors seem to be one thing above all to have in mind: the year-end rally. “Inflation is over and stock prices will rise,” predicts the well-known “Wall Street professor” Jeremy Siegel.

The bulls are banking on the year-end rally

While the extremely optimistic man would rather focus on value-oriented and high-dividend stocks and recommends that investors hold both value and growth stocks in a balanced portfolio, events on the markets are dominated in the short term by massive price gains in papers that had been badly damaged in the last few weeks. Market technicians explain this by saying that speculative traders and hedge funds had to “turn around” their positions. In other words, they initially bought back values ​​for which they had bet on falling prices in the past due to rising interest rates or weak operational development – and recently they are betting on a price boom similar to that during the pandemic.

In fact, stocks of asset managers such as Invesco and T.Rowe Price were among the big daily gainers on Thursday, gaining more than 16% on the assumption that their businesses will be better off than they have been in the past. Otherwise, the papers from well-known companies such as Caesars Entertainment, Etsy, Mohawk Industries, Autodesk, Nvidia, AMD, On Semiconductor, Carnival, Match, Amazon and Moody’s were also among the most sought-after.

Speculative values ​​in demand

On the Nasdaq, Marvell Technology, Atlassian, ASML, Zsacler, Zoom Video, Docusign and Datadog rose by up to 16%, although some of the names are among the favorite stocks of speculative investors such as Cathie Wood and although their operational performance measured against the Assessments can be critically questioned. This is reminiscent of the exaggerated euphoria in the cheap money phase and in the course of earlier price rallies, although interest rates are now significantly higher than they were then and although the American Federal Reserve is also significantly reducing its balance sheet and thus taking money out of circulation.

However, investors have seen this situation before. In August, for example, the Labor Department reported lower-than-expected inflation, sending stocks higher and yields lower until speculative optimism evaporated with the inflation report that followed. Some observers are reminded of the bursting of the tech bubble 20 years ago, when investors repeatedly grabbed shares in the downtrend in hopes of a turnaround.

Is that consistent with the higher interest rates?

Assuming that inflation is persistent and interest rates remain high, then interest rates will remain high for an extended period of time and the valuation paradigm based on this will differ significantly from that in 2019. Valuations would have to remain low or even fall if it were to should come a recession with rising unemployment and falling earnings. In fact, a security is not automatically cheap if its price has fallen by 60 percent. Because maybe it was just completely overpriced before.