The Dow ripped higher last week. Why doubters ‘don’t believe in this rebound.’

The U.S. stock market just put in its best week of 2023 as Treasury yields tumbled, stoking hopes for an early “Santa rally” to end the year. Scrooges say there’s still plenty that stands in the way.

“I don’t believe in this rebound and I don’t think we get a year-end rally,” said Jason Hsu, chief investment officer at Rayliant, in a phone interview.

Doubters contend early signs of cooling labor market. which is currently reinforcing market expectations the Federal Reserve is finished hiking rates, remains likely to curdle into a full-blown slowdown that crimps consumer spending and whacks corporate earnings in coming quarters.

Bulls counter that the consumer is holding up well coming off remarkably strong third-quarter gross domestic product growth

that defied economists’ predictions the U.S. would be in recession by now. Consumer spending has remained robust, rising by 4% from July to September 

Consumer credit is where bearish investors see trouble brewing. “Data suggests the consumer is tapped out in terms of credit,” Hsu said.

Consumers, previously flush from pandemic stimulus payments, have been increasingly reliant on credit cards to fuel spending. Revolving credit as a share of personal spending sits below pre-COVID levels, but the trend is “concerning,” said Michael Reid, U.S. economist at RBC Capital Markets, in a note.

Key Words: Target CEO says consumers are cutting back — even on food spending

Personal interest payments as a percentage of disposable income hit 2.7% in September and will continue to rise as federal student loan payments resume, Reid said. As monthly interest payments rise, consumers will need to further dip into savings to maintain current spending levels (see charts below).

advanced 6.6% — their biggest weekly rises since last November.

Previously jittery bulls now see a clear path for a year-end rally.

November and December have been the best two-month period on the calendar from a historical perspective with an average gain of 3% and positive performance 75% of the time, noted Mark Hackett, chief of investment research at Nationwide, in a note.

Also, the market’s “relief rally” had “some notable echoes of the market bottom of a year ago, with extreme weakness in momentum and sentiment indicators,” Hackett wrote. “The resilient macro backdrop, strong seasonality, and improved valuations should provide tailwinds into year-end.”

Technical analysts said the market’s bounce, particularly Thursday’s 1.9% advance by the S&P 500, helped cheer up the charts. The bounce also came as markets had become significantly oversold and bearish sentiment extreme, which can be contrarian catalysts for a rebound.

However, there’s still more work to be done to throw off the gloom, said Adam Turnquist, chief technical analyst for LPL Financial, in a Friday note.

Thursday’s rally pushed the S&P 500 back above its closely watched 200-day moving average at 4,248. That’s a “step in the right direction,” but a close above 4,400 is needed for the index to reverse the emerging downtrend, Turnquist said, noting that market breadth remained underwhelming, with less than half the stock in the S&P 500 trading above their 200-day moving average.