Why are stocks rallying?

North American stock markets continued advancing last week, hoping that central banks worldwide and the US in specific will relax their monetary tightening program. The markets are even pricing cuts in interest rates in 2023. The hope pushed equity benchmarks higher with S&P 500 and Nasdaq advancing 7.0% and 16.8% year to date. Canada’s main benchmark is up 3.7% in 2023.

During the last few weeks, a liquidity crisis, caused by higher interest rates and duration mismatch, hit the regional banking sector of the United States which then spread to Europe and took down Credit Suisse. This caused the prices of bonds and government treasuries to go up as safe havens and implied rates to go down.

The markets started believing that higher rates will crack the economy so authorities including US central bank will no longer raise the rates. This belief is in contrast with the continued reiteration from US Fed, that they are determined to see inflation going down before even thinking about lowering interest rates.  If their goal materializes, it means lower growth and a potential recession, multiple, and earnings contraction, which does not favor stock markets. 

Therefore, no matter the direction of the policy, stocks should not be the beneficiary but keep advancing. This move is hard to digest for many professional money managers.