The S&P 500 was pressing higher Wednesday, with the widely followed index nearing a potential exit from correction territory as stocks surge in November.
Stocks are seeing a strong rebound this month, but the risk versus reward in equities remains “unattractive” as the Federal Reserve continues to hold interest rates at a restrictive level, according to JPMorgan Chase’s Marko Kolanovic.
“Falling bond yields are being interpreted by equity markets as a positive in the near term,” said Kolanovic, JPMorgan’s chief global market strategist, in a research note on global asset allocation. Yet, “absent pre-emptive rate cuts by global central banks, we see risks compounding with peak effect of restrictive monetary policy still ahead.”
Fresh economic data released Wednesday showed retail sales in the U.S. fell in October for the first time in seven months, although it was a slight decline of 0.1% and smaller than forecast by economists polled by The Wall Street Journal.
Kolanovic has raised concern that high rates on consumer loans and diminishing consumer savings risk hurting company profits in the coming quarters.
“Ultimately, consensus expectations of 12% forward EPS growth, which in our view is divorced from these risks, should be revised lower,” he said in the note, referring to earnings per share.
U.S. stocks have jumped in November, with the S&P 500 climbing around 7.5% so far this month. That’s based on the index
SPX
trading up 0.2% on Wednesday afternoon at around 4,506, according to FactSet data, at last check.
The S&P 500 would need to close slightly above 4,529 to exit correction territory, according to Dow Jones Market Data. A correction is a fall of more than 10%, but less than 20%, from a recent peak. A market exit corrections when it subsequently rises 10% or more from its correction low.
The recent strong advance in equities, which follows three straight months of losses for the index, comes amid a drop in Treasury bond yields in November.
On Wednesday, the yield on the 10-year Treasury note
BX:TMUBMUSD10Y
was rising to around 4.54%, according to FactSet data, at last check. But it remained down in month-to-date trading after on Tuesday seeing its biggest drop since March 10 based on 3 p.m. Eastern Time levels, according to Dow Jones Market Data.
As for central banking policy, the Federal Reserve decided at its policy meeting earlier this month to keep its benchmark interest rate at a target range of 5.25% to 5.5%, leaving it a 22-year high as the Fed continues battling inflation.
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