Wall Street stormed this week after absorbing a long-awaited rate hike from the Federal Reserve, leaving investors to consider whether stocks are poised for a sustained rebound or more turbulence.
After a months-long beating, the S&P 500 posted its best weekly gain since November 2020 as investors applauded greater clarity on monetary policy and an encouraging assessment of the U.S. economy from the Fed. The surge has nearly halved the indices’ year-to-date losses, although they are still down 6.7% for 2022 after suffering a correction last month.
Whether to embark on the rally is a thorny question in a market that still faces its share of risks, including the hawkish rate hike path the Fed unveiled on Wednesday and geopolitical uncertainty surrounding the invasion of Ukraine by Russia.
Still, some big banks think the worst may be over, for now. Strategists at UBS Global Wealth Management said Friday that the expected pace of Fed tightening is consistent with rising equities and advised clients to stay invested in equities.
Earlier in the week, JPMorgan forecast the S&P 500 to end the year at 4,900, about 10% above Friday’s close, saying markets have now cleared the Fed’s long-awaited takeoff with policy. probably as warmongering as possible.”
Others are less optimistic. Concerns that the Fed’s fight against inflation could hurt growth were reflected in the bond market, where the flattening of the yield curve accelerated after the Fed’s monetary policy meeting this week. An inverted yield curve, in which yields on short-term government bonds exceed those on longer-term bonds, has been a reliable predictor of past recessions.
Stubborn inflation, sky-high commodity prices and few signs of an end to the war in Ukraine further cloud the picture for investors, said Rick Meckler, partner at Cherry Lane Investments.
Markets are more complicated now by interest rates, they are more complicated by inflation, and they are certainly more complicated by the Russian situation, he said. You’ve had a lot of people this week thinking we’ve bottomed out, but it’s hard to keep having higher and higher prices just on that basis.
Many also believe that the week’s strong equity gains are unlikely to calm the economic worries that have fueled bearish sentiment in recent months.
Fund managers’ allocation to cash is at its highest level since April 2020, according to BofA Global Research’s monthly survey. Bearish sentiment among retail investors is close to 50%, the latest survey from the American Association of Retail Investors showed, well above the historical average of 30.5%.
“The thing we’re most concerned about right now…is really whether we’re going into a recession or not,” said King Lip, chief strategist at BakerAvenue Asset Management.
Wary of a potential “stagflationary” environment of slowing growth and rising inflation, Lip’s company invests in energy stocks, commodities and precious metals such as ETFs on gold or stocks gold mines.