(Bloomberg) — For all the bank meltdowns, the drop in bond yields, the drop in oil and mining stocks and daily volatility, Adam Sarhan puts this week in the win column.
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“The stock market had every chance of crashing, but it didn’t,” said Sarhan, author of Psychological Analysis: How to Make Money, Outsmart the Market, and Join the Smart Money Circle and founder of 50 Park Investments. . “That is optimistic.”
The persistence of resilience is largely in the hands of the Federal Reserve, whose attitude to interest rates is the root cause of all the turmoil — and may be what calms it down.
The S&P 500 index rose 1.4% and the tech-heavy Nasdaq 100 index rose 5.8% in its best week since November, even as a key Fed meeting looms and expectations of a ninth consecutive rate hike. . But after a year of lamenting the central bank’s tightening of monetary policy, investors now see further rate hikes as a sign of confidence in the economy and financial system.
“Some people think the stock market would react very badly if the Fed didn’t raise rates,” said Mimi Duff, managing director of GenTrust. “To land the plane, there will be some turbulence.”
Even as a growing crisis of confidence in the US banking system has rattled investors, movements in the Cboe Volatility Index have not necessarily shown as much. The VIX, Wall Street’s main fear gauge, closed at 25.5 on Friday, below last year’s average level. And a look at the so-called VIX slope also shows that anxiety is starting to subside.
The cost of protecting against gains on the VIX next month has been decreasing since March 10th, when the crisis in the banking system became apparent. The implied volatility in contracts betting on a drop in the fear meter in the next month has increased.
Sarhan of 50 Park is long on US equities in the near term, including technology and growth stocks such as chip stocks and some brokerages such as Charles Schwab Corp. and Apple Inc., known for their stability and strong cash flows. The Russell 1000 Growth Index jumped 4.1% this week, while its value counterpart dropped 1.7%, the biggest difference between the two since 2001.
For all the turmoil in the banking sector, markets don’t expect the Fed to suddenly become dovish. Traders expect a quarter point upside next week to a range of 4.75% to 5%. They also anticipate the peak of the basic interest rate in May.
The problem with growth stocks is that inflation remains a drag, meaning the Fed is likely to be pressured to continue raising well beyond Wednesday’s meeting, said Brian Frank, portfolio manager at the Frank Value Fund. He suggests buying bearish energy stocks – typically seen as a hedge against inflation – after the group fell 7% this week on falling US oil prices.
A key focus for investors will be the Fed’s guidance for the coming months. In particular, they will be looking for any changes to the latest quarterly rate projections, known as the dot chart, after some policymakers suggested it might be appropriate to slow the pace of increases if wage growth cools, which is showing signs of doing so.
Economists at Barclays Plc led by Marc Giannoni estimate that the median of the dot plot will show a 2023 peak of 5.1%. This is in line with what officials projected at their December meeting.
“The market has recovered at points this week, acting like SVB and Credit Suisse are one-offs and the banking system can tolerate that, but I don’t agree,” Frank said. “I lost some sleep over it. I’m still not convinced it’s okay. I haven’t bought bank stocks since 2008.”
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