Home NewsEconomy News After sizzling rebound, investors weigh whether stocks have more bounce By Reuters

After sizzling rebound, investors weigh whether stocks have more bounce By Reuters

by WOOWinvest
0 comment
Yellen says Biden economic plan to spread growth across more 'places and races' By Reuters



© Reuters. A sign is seen outside the entrance to 11 Wall Street of the New York Stock Exchange (NYSE) in New York, U.S., March 1, 2021. REUTERS/Brendan McDermid

Lewis Krausskopf

NEW YORK (Reuters) – Wall Street slammed back this week after digesting a long-awaited Federal Reserve rate hike, leaving investors to decide whether stocks will continue to rally or see more volatility.

After a months-long slump, the index posted its biggest weekly gain since November 2020 as investors cheered the clarity on monetary policy and the Fed’s encouraging assessment of the U.S. economy gain. The surge has nearly halved the index’s year-to-date losses, although it is still down 6.7% in 2022 after slipping into a correction last month.

Whether to join the rally is a tricky question in a market still at risk – chief among them the Fed’s hawkish path to rate hikes on Wednesday and geopolitical uncertainty over Russia’s invasion of Ukraine.

However, some big banks believe that the worst may be over now. Strategists at UBS Global Wealth Management said on Friday that the expected pace of Fed tightening was “in line with the stock market rally” and advised clients to stay invested in stocks.

JPMorgan Chase & Co (NYSE: JPMorgan) earlier this week forecast the S&P 500 would close the year at 4,900, about 10% above Friday’s close, and said the market “has now cleared the much-anticipated Fed rate hike. Policy could be as tough as possible.”

Others are less optimistic. Concerns that the Fed’s fight against inflation could be a drag on growth was evident in bond markets, with a flattening of the yield curve accelerating after the Fed’s policy meeting this week. An inverted yield curve with short-term government bond yields higher than long-term bond yields has been a reliable predictor of past recessions.

Rick Meckler, a partner at Cherry Lane Investments, said stubborn inflation, high commodity prices and few signs of an end to the war in Ukraine further clouded investors.

“The market is now more complicated by interest rates, more complicated by inflation, and more complicated by the situation in Russia,” he said. “There’s been a lot of people this week who think we’ve hit a bottom, but based on that alone, it’s hard to keep prices going higher and higher.”

Many also believe that this week’s sharp rally in stocks is unlikely to quell the economic worries that have fueled bearish sentiment in recent months.

Fund managers’ cash allocations are at their highest level since April 2020, according to Bank of America Global Research’s monthly survey. Bearish sentiment among retail investors is close to 50%, well above the historical average of 30.5%, according to the latest survey by the American Association of Individual Investors.

“The thing that worries us the most right now…is really whether we’re going to be in a recession,” said King Lip, chief strategist at BakerAvenue Asset Management.

Wary of a potential “stagflation” environment of slowing growth and rising inflation, Lip’s company is investing in energy stocks, commodities and precious metals such as gold ETFs or gold mining stocks.

Cresset Chief Investment Officer Jack Ablin said Cresset Capital Management advised clients to reduce their holdings of equities and increase their exposure to gold, which is seen as a safe-haven asset.

“We’ve definitely seen the Fed be very aggressive, and it’s really made fighting inflation its top priority, not necessarily protecting stock market values,” Abrin said.

To be sure, signs of rampant pessimism — such as high cash levels and pessimism — are often seen as bullish contrarian indicators for stocks. In fact, hedge funds tracked by Bank of America Global Research have recently piled into cyclical stocks, which tend to thrive when economic growth is strong.

“Despite waning optimism about global growth, clients appear unprepared for a recession,” strategists at BoFA wrote.

Historically, stocks have weathered rate hike cycles well. Since 1983, the S&P 500 has returned an average of 5.3% in the six months following the Fed’s first rate hike, according to UBS.

“The Fed’s goal remains to design a soft landing for the economy,” analysts at the firm wrote. “We advise investors to prepare for higher rates while continuing to participate in the stock market.”

You may also like

Leave a Comment

Our Mission is to help you make better trading decisions by providing actionable investing content, comprehensive tools, educational resources and assist you in making more money in the stock market.

Latest News

Newsletter

Subscribe my Newsletter for new blog posts, tips & new photos. Let's stay updated!

@2022 – All Right Reserved. Designed and Developed by WOOW Invest

This website uses cookies to improve your experience. We'll assume you're ok with this, but you can opt-out if you wish. Accept Read More

Privacy & Cookies Policy