Bear market remains but the Dow still posted its best month since 1976

All 3 major US indices recovered after suffering one of the worst Septembers in recent history.

US stock markets ended lower on Monday but each of the 3 major indices closed higher for the month.

The gains were led by The Dow Jones Industrial Average, which ended October up 14% – its best monthly gain since January 1976.

By comparison, the S&P 500 and Nasdaq gained about 8% and 3.9%, respectively, for the month.

The 30-stock Dow has climbed on the back of resilience by more traditional companies such as banks during the bear market and hopes that they will lead a bull run when the current down cycle reverses.

That helped it post its best month in 46 years.

Why did the Dow have its best month since the 70s?

The Dow's October fireworks have come despite a mixed third-quarter US earnings season, which has shown slowing growth and major disappointments from large tech companies such as Meta (NASDAQ: FB) and Amazon (NASDAQ: AMZN) as investors drifted away from the growth sector.

Investors have turned jittery over the last 6 months as central banks around the world, led by the US Federal Reserve (the Fed), have embarked on aggressively lifting interest rates to tamp down on surging inflation.

It has led to widespread concerns that the major economies, including the US and Europe, are heading towards a recession because of the central bank action that is curbing spending and driving up interest costs for households and businesses.

US stocks officially entered a bear market in June, having fallen more than 20% from a high in January.

Traders are preparing for the latest Fed meeting this week with the US central bank widely expected to again hike interest rates by 75 basis points on Wednesday. But the circumstances seem to be slightly different this time.

Latest data showed a core gauge of US inflation accelerated in September, bolstering the Fed's case for another jumbo rate hike this week. But a contraction in manufacturing and services and lower-than-expected US home sales indicate that the Fed's actions are already hitting the economy. Strong GDP data has also briefly calmed fears of an imminent recession.

Hopes the Fed may pull back from its aggressive interest rate hike policy have lifted the equities market in recent weeks.

Traders on Wall Street are now keenly watching for a signal from the Federal Open Market Committee's statement or chair Jerome Powell's press conference that the Fed could pause or reduce the size of its hikes in the near future.

Has the market turned?

UBS Global Wealth Management's head of asset allocation for the Americas has written in a note to clients that although quarterly earnings were better than feared, the recent bear market rally "doesn't look sustainable" given the bond market's weakness.

Other analysts also say that based on historical evidence, US stocks may still be only two-thirds of the way through the current bear market.

Economists expect the Fed to raise rates by 75 basis points on Wednesday – the fourth time in a row. Rates are projected to rise another half percentage point in December, then by quarter points the following 2 meetings.

Investment bank JPMorgan Chase & Co.'s trading desk says there could be a rally should the Fed turn dovish when it announces its decision on Wednesday.

The S&P 500 could surge at least 10% in a day if the central bank raises interest rates by a slower-than-expected half a percentage point and the Fed's Jerome Powell signals willingness to tolerate elevated inflation and a tightening labour market – even though this scenario is the "least likely" to materialise.

More likely is a 75-basis-point hike and the option to repeat the same for December and 2023 meetings, the bank said.

Meanwhile, rival Morgan Stanley's strategist Mike Wilson believes the bear market in US equities may conclude sooner than investors think. He expects the bear market to end in the first quarter of 2023.