Stocks kick off October with a huge rally

New York CNN Business  — 

Stocks kicked off October with more treats than tricks for investors. The market rallied to begin the fourth quarter, despite growing and weak economic data.

The Dow rose 765 points, or 2.7%. That was its biggest gain since mid-July. The Nasdaq and S&P 500 gained 2.3% and 2.6%, respectively. Stocks ended September (and the third quarter) with a resounding thud on Friday.

In a sign of how volatile the market is, all but one of the 30 Dow stocks ended the day higher Monday — after they all finished lower Friday. (Johnson & Johnson (JNJ) was Monday’s lone laggard.)

Investors are increasingly worried about inflation and how the Federal Reserve’s aggressive rate hikes to control surging prices could eventually tip the economy into a recession.

Stocks are still down sharply this year. And the CNN Business Fear & Greed Index, which measures seven indicators of investor sentiment, is still showing Extreme Fear levels. But Monday’s market rebound might be a perverse “bad news is good news” rally.

Fears about rising stress at Credit Suisse (CS) may lead the Fed to slow down its pace of rate hikes. Bond market investors seem to be betting that as well. The yield on the benchmark 10-year US Treasury bond, which briefly topped 4% last week, has slid in recent days and fell again Monday to about 3.66%.

Inflation, of course, is still a concern. But if the Fed and other central banks now also have to fear how a distressed European bank could lead to further financial contagion, then this might not be the best time to keep jacking up rates by historic amounts.

Just a week ago, traders were pricing in more than 70% odds that the Fed would raise interest rates by three-quarters of a percentage point for the fourth consecutive time at its November 2 meeting. Now the chances of a rate hike that large are down to about 50%, as the probability of a more modest half-point increase grows.

The latest manufacturing data in the US might also give the Fed reason to reconsider how much it should be raising interest rates.

The Institute for Supply Management, a non-profit economic association, reported that its influential manufacturing index fell from August and was below Wall Street’s forecasts. That could be a sign that the Fed’s rate hikes are already having the desired effect of slowing the economy and reducing inflation.

“The economy is slowing – a reality that is increasingly apparent in the manufacturing sector. The good news is that there are welcome signs that prices are stabilizing,” said Jim Baird, chief investment officer with Plante Moran Financial Advisors, in a report Monday.

A spike in oil prices, while unwelcome news to consumers, lifted energy stocks Monday as well.

Chevron (CVX) was the top Dow stock, and the energy sector was the best performer in the S&P 500. Oil stocks got a boost following reports that suggested that the OPEC+ bloc of petroleum producers are considering a cut in production to try and reverse the recent big slide in crude prices.

Investors may also have taken solace in the fact that the British pound, which has recently tumbled to record lows versus the US dollar, rebounded after the new UK government abandoned a controversial plan to cut taxes for the wealthiest Brits.

A stronger pound may allay fears about surging bond yields and rising credit costs in the UK.

In corporate news, Tesla (TSLA) was one of the few stocks that didn’t take part in Monday’s rally. Shares of Elon Musk’s electric car giant fell nearly 9%, making the company the worst performer in the S&P 500, after it reported over the weekend.

Meanwhile, Tesla rival GM (GM) rallied after reporting stronger-than-expected third quarter sales.