Waiting for the Federal Reserve to make a dovish pivot has reminded me of how Charlie Brown continually got faked out by Lucy whenever he tried to kick the football she was holding.

However, as the fourth quarter gets underway, underlying conditions suggest that perhaps the central bank will find reasons to ease up on tightening…not this year, but in early 2023.

Will investors finally get to kick the football, or end up flat on their backs again? Let’s dissect the clues.

September was a cruel month for investors. Just as it seemed that the bear market had bottomed and a powerful rally was underway to make up for lost gains, the major indices plunged and finished the month at new lows for 2022.

Last week was nerve-wracking as well. Although the indices managed to carve out a gain for the week, the rallies of Monday and Tuesday gave way to a three-day slump. A major culprit was the jobs report for September, which showed a cooling labor market that still wasn’t cool enough.

The overwhelming consensus had been that June witnessed the bear market’s bottom, a notion that proved illusory. Maybe September didn’t mark the ultimate bottom, either. However, last week’s gains offered a tantalizing hint of better days ahead (see chart).

The major U.S, stock market indices remained opened on Monday (Columbus Day), and closed lower as follows: the Dow Jones Industrial Average -0.32%; the S&P 500 -0.75%; the tech-heavy NASDAQ -1.04%; and the small-cap Russell 2000 -0.60%.

After the closing bell Tuesday, the U.S. indices posted a mixed performance: the Dow +0.12%; the S&P 500 -0.65%; the NASDAQ -1.10%; and the Russell 2000 +0.06%.

All eyes on the CPI and PPI…

For a lasting rebound to occur, we’d first need to see a consistent trend of lower inflation readings, which makes this week’s inflation readings all the more important.

It also pays to keep an eye on the bond market, which represents a “collective wisdom” about the future direction of not just bonds but also stocks.

Gyrations in interest rate expectations and bond yields have been the primary force behind equity performance this year, a dynamic that will continue in the months to come. When yields surge, stocks slump…and vice versa.

While last week’s labor-market trends were important, it is the inflation readings released on Wednesday (the producer price index) and Thursday (the consumer price index), both for the month of September, that will either support or derail the auspicious beginning to Q4.

Another barometer will be third-quarter earnings season, which starts October 14 with reports from the major banks. Estimates for Q3 year-over-year earnings growth have fallen dramatically, from 10.5% five months ago to 2.8% now, according to research firm FactSet.

Energy has been the top performing sector this year, a trend that was given additional impetus by the OPEC+ announcement last week of major crude oil production cuts.

Read This Story: Crude Revenge: Saudi Arabia, Russia Set to Cut Oil Output

Otherwise, the outperforming sectors have been defensive in nature, with utilities, health care, and consumer staples leading the way.

Stocks are forward-looking, and the Fed’s tightening has yet to fully materialize in the broader economy. We’ll likely see signs of economic contraction and easing inflation in the weeks ahead, which should take some pressure off the Fed.

A monetary policy pivot probably would ignite an equity rally. But then again, Charlie Brown always got his hopes dashed by Lucy. Stay defensive and stick to value.

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John Persinos is the editorial director of Investing Daily.

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