Blackrock says October’s rally may have been premature, and that any gains may give way as negative news awaiting investors at the end of the year comes to the fore.

BlackRock Chief Investment Strategist Wei Li said in an interview, “We believe the October rally in risk assets is really on shaky ground because markets previously were looking for a dovish pivot from the Fed and then they were looking for a pause from the Fed. So it feels like markets want to see some positive development in terms of a dovish message from the Fed. But really we are not at that juncture yet because if you look at core inflation, it’s still very, very sticky.”

So far the Dow Jones Industrial Average has gained 14% for October, putting it on course for its best performance since 1976. The Dow’s gains have been spread broadly across sectors, from a 13% gain for McDonalds, to an 18% jump for JP Morgan. Meanwhile the Nasdaq is up 7.5% while the S&P has gained 2.5% for the month.

Li sees the first test of the stability of these gains being the hawkish commentary which will likely accompany the announcement of the Federal Reserve’s policy decision this week.

Li explained, “We believe that rates will continue rising. It will peak at 5%. And not too understate it, that’s a very, very restrictive territory. In fact, where we are now, at 3.25%, is already restrictive to the economy. So our belief is that in this current supply-constrained environment, the Fed is going to have to engineer a recession in order to bring down inflation. Our assessment is that if they were to want to bring down inflation to 2% reasonably quickly, it represents a 2% shock to the U.S. economy in 2023. It also represents 3 million additional people out of a job, pushing unemployment rate to 5%.”