(Bloomberg) – Despite all the bank meltdowns, falling bond yields, hammering 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 cratering, but it 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 resilience persists largely depends on the Federal Reserve, whose attitude toward interest rates is the source of all the turbulence — and may be what calms it down.
The S&P 500 index rose 1.4% and the tech-heavy Nasdaq 100 index climbed 5.8% for its best week since November, even with a pivotal Fed meeting ahead and a ninth increase consecutive rate expected. But after lamenting the central bank’s monetary policy tightening for a year, investors now see further rate hikes as a sign of confidence in the economy and the financial system.
“Some people think the stock market would take it very badly if the Fed didn’t raise rates,” said Mimi Duff, managing director of GenTrust. “To land the plane, there is going to be turbulence.”
Although a spiraling crisis of confidence in the US banking system has rattled investors, movements in the Cboe Volatility Index have not necessarily shown it. The VIX, Wall Street’s main fear gauge, closed at 25.5 on Friday, below its average level a year ago. And a look at the VIX’s so-called bias also shows that the anxiety is starting to subside.
The cost of protection against gains in the VIX over the next month has been declining since March 10, when the crisis in the banking system became evident. The implied volatility of contracts betting on a fall in the fear gauge over the next month has increased.
50 Park’s Sarhan is long in short-term U.S. stocks, including battered tech and growth stocks like chip stocks and some brokerage firms, such as Charles Schwab Corp. Investors bought classic tech growth companies like Microsoft Corp., Alphabet Inc. and Apple Inc. which are known for their stability and strong cash flows. The Russell 1000 Growth Index jumped 4.1% this week while its value counterpart fell 1.7%, the biggest gap between the two since 2001.
Even with all the turmoil in the banking sector, markets don’t expect the Fed to turn dovish all of a sudden. Traders expect a quarter-point rise next week in the 4.75% to 5% range. They also expect the policy rate to peak in May.
The catch for growth stocks is that inflation remains a hurdle, which means the Fed will likely be forced to continue to rise well beyond Wednesday’s meeting, said Frank Value portfolio manager Brian Frank. fund. He suggests buying downed energy stocks – generally seen as an inflation hedge – after the group lost 7% this week as US oil prices fell.
The direction of the Fed for the coming months will be the focus of investors’ concerns. In particular, they will be looking for any changes in the latest quarterly rate projections, known as the dot plot, after some officials suggested it might be appropriate to slow the pace of increases if wage growth slows, which who shows signs of doing so.
Barclays Plc economists led by Marc Giannoni estimate that the median of the dot chart will peak in 2023 at 5.1%. This is in line with what officials had planned at their December meeting.
“The market has rallied at times this week acting like SVB and Credit Suisse are unique and the banking system can tolerate that, but I disagree,” Frank said. “I lost some sleep over it. I’m still not convinced that everything is fine. I haven’t bought a bank stock since 2008.”
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