The stock market finally had a winning week. Why it might not last.

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Ed Yardeni, founder of Yardeni Research: “We are now increasing the odds of a recession by 30% to 40%.”

Christopher Goodney/Bloomberg

The stock market has ended its weeks-long losing streak, and like a sports team finally winning, it’s worth celebrating. That just doesn’t mean the team or this stock market is good.

Still, it was quite a relief when the market finally managed to string together a few good days, enough for the


Dow Jones Industrial Average

to gain 6.2% for the week, ending an eight-week losing streak. After seven long weeks of decline, the


S&P 500 Index

increased by 6.6%, and the


Nasdaq Compound

climbed 6.9%. And that was reason enough to be optimistic.

“Equities finally had a strong rebound this week,” wrote Canaccord Genuity analyst Martin Roberge. “Simply put, just like a rubber band that has been overstretched, the forces of pessimism are eliminated, hence the snapback rally.”

It’s also just exhaustion. Stocks can’t fall forever, although it sometimes looks like they will. And the market has given investors enough reason to at least relax. It started with

JPMorgan Chase
it is

(ticker: JPM) day for investors – a far more bullish day than expected, given all the recent fears of recession – and ended with a moderate rise in the Core Personal Consumption Expenditure Index which suggested, perhaps inflation had peaked.

But those were sideshows to the real narrative shift – the release of the minutes of the May Federal Open Market Committee meeting on Wednesday. The Federal Reserve committed to half-point rate hikes in June and July, but left open the possibility of more modest hikes — or none — from there. By the end of the week, the odds of the fed funds rate hitting 3% by the end of the year had fallen to 35% from 60% the previous week. A less aggressive Fed is exactly what the stock market has been looking for.

But is it enough? Deutsche Bank strategist Alan Ruskin said investors need to decide whether the 10-year Treasury yield at 2.75% and the S&P 500 near current levels are enough to bring inflation back towards 2%. “If the answer is YES (presumably supply improvements dominate any push toward lower inflation), then risky assets are safe,” Ruskin writes. “If the answer is NO, then the Fed will have to work harder to increase [short term] rates higher than what is priced, leading to a greater tightening of financial conditions. In case you haven’t guessed, my personal opinion is: NO.

And even some of the bulls recognize that the risks have increased, even with the stock market rally. Ed Yardeni of Yardeni Research notes that the Fed’s focus on inflation caused the market’s latest panic attack. “But this one won’t end until inflation moderates significantly on its own or with the help of a Fed-induced recession, either by design or by accident,” writes -he. “We believe this can happen without a recession. Nevertheless, we are now increasing the probability of a recession from 30% to 40%. »

What’s the best game when the economy and the stock market can go either way? It’s not the once high-flying speculative growth stocks that have been hit so hard this year, which demonstrated last week that they could still fall even after falling 50% or more.

Snowflake

(SNOW) fell 4.4% on Thursday after reporting revenue that showed signs of slowing demand from some of its customers, as lockdown favorites

Working day

(WDAY) fell 5.6% on Friday after its earnings fell short of analysts’ forecasts.

Instantaneous
it is

(SNAP) earnings were so bad that the stock not only fell 43% last Tuesday, but also dragged the Nasdaq Composite down with it.

Instead, investors are best served by avoiding unprofitable companies, especially highly leveraged ones, and focusing on those with stable earnings, positive free cash flow and a track record of managing the business cycle. “Instead of trying to figure out if it’s a hard landing or a soft landing, maybe it’s better to hedge on the downside,” says David Souccar of Vontobel Asset Management. “Now is the time to think about capital protection.”

Especially now that the market has finally regained that winning spirit.

Write to Ben Levisohn at Ben.Levisohn@barrons.com

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