Traders are finally starting to listen to the Fed and the signals from central bankers
A hot stock market rally fueled by technology stocks cooled off last week as investors seemed to finally get a handle on what the U.S. Federal Reserve’s sentiments really are, MarketWatch reports.
Bullish investors still see room for growth, as institutional investors and hedge funds try to catch up after cutting or paring stocks in their portfolios in last year’s tech crash.
At the other end, bearish sentiments are countering this amid a still-hot labor market and other factors that could push interest rates to even higher levels than expected – in line with the dynamics that have dictated market action in 2022 Mr.
Financial market participants this past week have come close to pricing in what the Fed has told them: the federal funds rate will peak above 5% and not be cut until 2024.
After Fed Governor Jerome Powell’s press conference on February 1st, the market still expected the federal funds rate to peak at 4.9% and end the year at 4.4%. The red-hot January jobs report released on February 3 helped turn the tide, along with a jump in the services sector Purchasing Managers’ Index (PMI).
Meanwhile, the yield on monetary policy-sensitive 2-year US Treasuries rose 39 basis points after the Fed meeting ended.
The jump in short-term yields was a message that appeared to rattle stock market investors, leaving the S&P 500 to post its worst weekly performance in 2023, while the Nasdaq Composite snapped a streak of five straight weekly gains.
Even so, stock prices are still rising in 2023. Bulls are becoming more numerous, but not so ubiquitous, experts say, as to pose a reverse threat.
So who’s buying? Individual investors have been relatively aggressive buyers since last summer, before stocks bottomed out in October, while options activity has tilted more towards buying call options as traders bet on the market’s rise rather than play protection by buying put options , points out Nationwide’s Mark Hackett.
Meanwhile, analysts say institutional investors are focusing on underweight stocks in the new year, particularly in the technology and related sectors, relative to their performance after last year’s collapse. This creates an element of FOMO, or Fear of Missing Out, which forces them to play catch-up and fuel the rally. Hedge funds were forced to unwind short positions, which also boosted gains.
However, last week contained some unwanted echoes of 2022. The Nasdaq fell while Treasury yields rose. The yield on the 2-year note, which is particularly sensitive to Fed policy expectations, rose to its highest level since November.
Options traders hedge against the possibility of a short-term increase in market volatility.
Meanwhile, the hot labor market highlighted by January’s jobs report, along with other signs of a resilient economy, are fueling concerns that the Fed could raise rates more than even central bankers’ current expectations.
Some economists and strategists have begun to warn of a “no-land” scenario in which the economy skirts a recession, or a “hard landing.” While this sounds like a nice scenario, the fear is that it will force the Fed to raise rates even higher than central bankers currently expect.
“Interest rates have to go up, and that’s bad for tech, bad for growth (growth stocks) and bad for the Nasdaq,” Thorsten Slok, chief economist and partner at Apollo Global Management, told MarketWatch earlier this week.
And while market participants have already adjusted their expectations largely in line with Fed officials’ remarks, they haven’t reported the new targets themselves, he adds.
Meanwhile, markets await Tuesday’s release of the consumer price index for January. Economists polled by The Wall Street Journal expected the consumer price index to show a 0.4 percent monthly rise, which would cause the annual rate to slow to 6.2 percent from 6.5 percent in December after peaking around 40 years from 9.1% last summer. Core inflation, which excludes volatile food and energy prices, is expected to slow to 5.4% year-on-year from 5.7% in December.
