Bear Market Rally Falters as Investors Worry About Rising Rates

The S&P 500 has been trending steadily higher since the middle of October, rallying an impressive 12%. Over the same time frame, the TSX advanced 5.3%. But that momentum hit a brick wall in the middle of November amid concerns the Bank of Canada and U.S. Federal Reserve will need to continue their aggressive rate hike campaign over the coming months.

What Happened to the Bear Market Rally?

A bear market rally is when the stock market stages a brief, and sometimes large, rally in the middle of a much larger bear market. They never last. Investor optimism if often upended with a dose of economic reality and the markets retrace.

In early November, U.S inflation numbers came out and energized the stock market. Investors were motivated by better-than-expected economic data from the Bureau of Labor Statistics, which reported the Consumer Price Index (inflation) came in at 7.7%. This was below the 7.9% forecast and below September’s reading of 8.2%.

This led investors to believe that the Federal Reserve’s aggressive rate hikes were working and that decades-high inflation was starting to ease. Investors all took it to mean the U.S. central bank might pivot from raising its rates to maintaining them or even lowering them.

The Federal Reserve has raised its rates six times this year, from 0.5% to a range of 3.75% to 4.0%, the highest since early 2008. The Bank of Canada meanwhile has raised its key lending rate six times as well, jumping from 0.25% to 3.75%.

Both central banks have warned they’re not done yet. Jerome Powell, head of the Federal Reserve, said that thoughts of a potential pause in rate hikes would be “very premature.” Which means the Fed still has a ways to go to fight inflation. Rates in the U.S. are expected to hit a peak of 4.5% to 4.75% in 2023. The same is true in Canada.

Those rising costs, which make it more expensive to borrow, will negatively impact both Canadians and Americans who are already struggling to keep up with the cost of living. With those rising expenses and higher borrowing costs weighing down the economy.

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The stock market has had great momentum over the last month, but that rally was fuelled by optimism that the Bank of Canada and Federal Reserve would be looking at pausing their oversized rate hikes. The fact is, both central banks will be raising their rates over the coming months, and that frustration is putting a damper on the bear market rally.

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