Investors feel bullish as ‘stock market had every chance to crater, but didn’t’ this week despite bank collapses
For all the bank collapses, the plunging bond yields, the hammering in oil and mining stocks and day-in, day-out volatility, Adam Sarhan puts this week in the win column.
Why?
“The stock market had every chance to crater, but didn’t,” said Sarhan, author of the book Psychological Analysis: How to Make Money, Outsmart the Market, and Join the Smart Money Circle and founder of 50 Park Investments. “That’s bullish.”
Whether the resilience persists is largely in the hands of the Federal Reserve, whose attitude toward interest rates is the root cause of all the turbulence – and could be what calms it down.
The S&P 500 Index rose 1.4% and the tech-heavy Nasdaq 100 Index soared 5.8% for its best week since November even with a pivotal Fed meeting coming and a ninth straight rate increase expected. But after a year of bemoaning the central bank’s monetary policy tightening, investors now view further rate hikes as a sign of confidence in the economy and financial system.
“Some people think the equity market would take it very poorly if the Fed didn’t raise rates,” said Mimi Duff, managing director at GenTrust. “In order to land the plane, there’s going to be some turbulence.”
Even if a spiraling crisis of confidence in the US banking system rattled investors, the moves in the Cboe Volatility Index didn’t necessarily show that. The VIX, Wall Street’s leading fear gauge, closed at 25.5 on Friday, below its average level last year. And a look at the so-called skew of the VIX also shows that anxiety is starting to subside.
The cost of protection against gains in the VIX over the next month has been subsiding since March 10, when the crisis in the banking system became apparent. Implied volatility in contracts betting on a drop in the fear gauge over the next month has gone up.
Long Tech
Sarhan of 50 Park is long US equities in the near-term, including battered tech and growth shares like chip stocks and some brokerage firms, such as Charles Schwab Corp. Investors have been snapping up classic tech growth companies like Microsoft Corp., Alphabet Inc. and Apple Inc. that are known for their stability and strong cash flows. The Russell 1000 Growth Index jumped 4.1% this week while its value counterpart sank 1.7%, the biggest gap between the two since 2001.
Even with all the turmoil in the banking sector, markets aren’t anticipating the Fed to turn dovish all of a sudden. Traders are expecting a quarter-point hike next week to a range of 4.75% to 5%. They also anticipate the policy rate peaking in May.
The catch for growth stocks is inflation remains an obstacle, meaning the Fed will likely be pressured to keep hiking well beyond Wednesday’s meeting, said Brian Frank, portfolio manager of the Frank Value Fund. He suggests buying beaten-down energy stocks — typically viewed as a hedge against inflation — after the group shed 7% last week as US oil prices slumped.
A key focus for investors will be the the Fed’s guidance for the months ahead. In particular, they’ll look for any change in the latest quarterly rates projections, known as the dot plot, after some officials suggested it may be appropriate to slow the pace of hikes if wage growth cools, which it’s showing signs of doing.
Economists at Barclays Plc led by Marc Giannoni estimate that the median of the dot plot will show a peak in 2023 of 5.1%. That’s in line with what officials projected at their December meeting.
“The market rallied at some points this week, acting like SVB and Credit Suisse were a one-off and the banking system can tolerate that, but I don’t agree,” Frank said. “I’ve lost a bit of sleep over this. I’m still not convinced everything is fine. I haven’t bought a bank stock since 2008.”