New York
CNN
—
Most of 2022 has been pretty bleak for investors, but stocks are in the midst of a fourth-quarter rally: The Dow notched its best month in nearly half a century in October and is on pace for the best month in 2022 It rose another nearly 4 percent in November.
While the Dow fell about 440 points, or 1.3%, on Monday, the blue-chip index is only down about 7% in 2022 and is just 7% below its all-time high.
If the Dow recovered all its losses and ended the year higher, it would be a stunning rally. As recently as mid-October, the Dow was in bear market territory for 2022, down more than 21%.
what happened? Top industrial stocks in the Dow, including Boeing (BA), Caterpillar (CAT) and Honeywell (HON), soared. So did stocks of retail/consumer giants Walgreens (WBA), Home Depot (HD) and Nike (NKE), as well as leading financial institutions Goldman Sachs (GS) and JPMorgan Chase (JPM).
The S&P 500 and Nasdaq remain heavily in the red through 2022, down 16% and 28%, respectively. Both indexes fell 1.4% on Monday. But even those indexes have rebounded sharply from year-to-date lows in recent weeks.
Several factors are at play. First, there is a growing sense that the Fed may have completed the most important part of its massive rate hikes. Inflation appears to have peaked.
The hope is that the U.S. economy will either experience a so-called soft landing or just a mild recession. If that happens, consumer spending probably won’t plummet. Neither will corporate profits. That’s good for stocks.
Still, some market watchers wonder whether the explosive market rally of the past few weeks has come too soon. Are investors suddenly getting dizzy? The CNN Business Fear and Greed Index, which measures seven indicators of market sentiment, is now showing signs of greed and is approaching extreme greed levels.
But others argue that the market rally may be justified, especially for stocks favored by conservative investors — such as companies that pay healthy dividend yields.
“We think equities are likely to stabilize. Inflation seems to be cooperating. So have earnings so far,” said John Augustine, chief investment officer at Huntington Private Bank. “But we’re more focused on revenue than growth.”
Augustine said investors should “cannibalize” the market rather than plunging headlong into riskier stocks. He noted that the S&P Dividend ETF (SDY) owns high-yield companies like VF Corp (VFC). (owner of The North Face and Vans), IBM (IBM) and 3M (MMM), are actually up 1% this year.
However, some analysts warned that the broader market sell-off may not be over yet.
“I see a lot of similarities to the 2000 downturn. There were a couple of times when the stock market rallied and then came back down,” said John Duffy, co-founder of Trending Stocks.
After the tech bubble burst in 2000, stocks traded in fairly tight ranges for nearly three years, with the Nasdaq lagging the Dow and S&P 500 significantly. That could happen again.
Duffy said he would also be cautious on consumer stocks given ongoing concerns about the economy and the eventual impact of higher interest rates. But he thinks energy stocks could be more resilient, with industrials and materials also attractive.