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The Dow Industrial Average (^DJI), Nasdaq Composite (^IXIC), and S&P 500 (^GSPC) extended their winning streaks to four days on Wednesday, leaving the major US stock indexes broadly positive after two disappointing months of losses.
At the end of July, the Nasdaq was sitting on gains nearing 40%, returns that few, if any, investors expected at the beginning of 2023.
But the months of August and September are well known by investors as seasonally weaker periods for the stock market. And this year proved no exception.
And with markets acting better and Wall Street looking for the potential end of a three-quarter earnings recession, the bulls are reasserting control.
The September Consumer Price Index (CPI) report out Thursday morning could easily put a fork in the fledgling stock market rally with an upside surprise in the headline number.
If Thursday's CPI report suggests the Fed has not been able to contain inflation, that could challenge the current bull market. As we discussed last week, the bond market is in the midst of a bear steepener that tends to end in tears — and a super-hot CPI print could be that catalyst.
JPMorgan is expecting the headline month-over-month CPI number to come in at the Street's consensus of 0.3% or below, which would be bullish for stocks.
The investment bank is still placing ~5% odds on a month-over-month number that comes in above 0.6%, and 27.5% odds we see inflation rise between 0.4% and 0.6% from the prior month.
In either of those two cases, JPMorgan expects stocks to tumble as investors brace for more forceful action from the Fed.
But away from any unexpected headlines or shifts in the economy, seasonal trends are now shifting from bearish to bullish into year-end, providing a powerful tailwind for stocks.
As we pointed out at the beginning of August, the CBOE Volatility Index (^VIX) has entered a seasonally bullish period that history suggests will last into mid-October. All else equal, a rising VIX is bad for stocks.
Now, historically, the VIX tends to peak twice in October, then trend downwards into the end of the year. That first peak is officially in the rearview mirror as of today.
And although the market's rally to start the year came as a surprise to many, data we explored back in July painted a rosy picture for investors. As we noted back in the summer, only the Black Monday crash of 1987 stopped the S&P 500 from rising over the year's final five months after a 10% gain through July.
Barring a similarly dramatic turn for this market, October's trading action suggests history might remain on the side of the bulls once again.
Read more inflation coverage:
Inflation: Consumer prices rose 3.7% over last year in September, matching August's increase
Fed can stay 'patient' after inflation data as odds rise on a December rate hike
Gas price increases eased but still 'major contributor' to September inflation print
Housing costs again frustrate the Fed’s efforts to curb inflation
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