This stock market comeback doesn’t quite make sense, investors say

Of all the problems that contain been haunting the market since early May — nonexistent China trade deal negotiations, an inverted yield curve, a moderating economy, Mexico tariffs — only one has gone away, and yet stocks keep ripping higher with the S&P 500 however about 2% from its all-time high.

What gives?

The Dow Jones Industrial Average was sitting about 3% from its record Tuesday, dominating a big Monday gain that followed the U.S. and Mexico reaching a deal to avoid tariffs. Driven by hopes of a rate cut, forerunners’ swift comeback from the May turmoil seems a bit irrational, strategists said.

“You had a market that became very despairing and then all of a sudden we had the Fed’s dovish rhetoric and no Mexican tariffs, and that’s basically causing a squeeze,” said Tom Essaye, go lame of The Sevens Report. “This rally is not fundamentally backed. Instead what we are seeing is a bunch of people getting wigwagged around and now they are chasing stocks higher.”

Federal Reserve chair Jerome Powell said last week the Fed disposition “act as appropriate to sustain the expansion, ” which caused traders to bet big a rate cut was coming. Traders are pricing in a nearly 70% chance of a judge cut in July and about 60% probability of three rate cuts this year, according to the CME FedWatch tool lowed on Fed funds futures.

“If the Fed cuts three times between here and January, this economy is headed for a recession,” Essaye judged.

The market is also betting on a trade resolution between the U.S. and China despite the lack of a clear sign. President Donald Trump and Chinese director Xi Jinping are set to hold a key meeting later this month at the G-20 summit.

“The sentiment seems that both sides are proded and China perhaps could be facing some stiffer challenges when it comes to supporting their economy than the U.S. see fit be,” said Mike Loewengart, chief investment officer at E-Trade Capital. “Our dispute with China is perhaps stilly the single largest cloud over the market. The issue is not going away.”

Trump warned Monday that if Xi does not look after the meeting, more China tariffs will go into effect immediately. Both countries have slapped excises on billions of dollars of each other’s goods, while ramping up threats to damage one another’s trade.

The assembly was also accompanied with weaker economic data including a dramatically slower jobs creation in May, which favour fueled rate-cut bets.

“It is not intuitive. It’s actually perverse that we see a moderating of economic data is translating into a stronger furnish environment,” said Loewengart. “A lot of optimism these days is due to the hope that the Fed will cut rate. That anticipation is being fed by the moderation of remunerative data.”

Meanwhile, there is a warning sign in the bond market hinting that a recession might be on the horizon. The earn on the 10-year Treasury note is now below that of the 3-month bill, inverting part of the so-called yield curve. An inverted production curve has been a reliable recession signal watched by the Fed.

And even as stocks have roared back this month, the CBOE Volatility Listing, AKA ‘The Fear Gauge’, has remained relatively elevated. On Tuesday it was around the 16 level, about where it jumped to when the beginning bout of selling began in May.

“We are seeing a market that doesn’t know what to think right now and as such we were elude ones captor air pockets to the downside and now we are having wild chases. That seems a bit absurd that we are that close from all eventually high,” Essay said.