After a sizzling recovery, investors are weighing whether stocks have more bounce

A sign is seen outside the 11 Wall Street entrance to the NYSE in New York
A sign is seen outside the 11 Wall St. entrance of the New York Stock Exchange (NYSE) in New York, the United States, March 1, 2021. REUTERS/Brendan McDermid

March 19, 2022

By Lewis Krauskopf

NEW YORK (Reuters) – Wall Street stormed back this week after absorbing a long-awaited Federal Reserve rate hike, leaving investors to decide whether stocks are set for a sustained recovery or more turmoil.

After a month-long slump, the S&P 500 posted its best weekly gain since November 2020 as investors hailed greater clarity on monetary policy and an encouraging Fed view of the US economy. The surge cut the index’s year-to-date losses by nearly half, though it’s still down 6.7% for 2022 after ending in a correction last month.

Whether to board the rally is a thorny question in a market still facing its share of risks — most notably the hawkish rate-hike path the Fed unveiled on Wednesday and geopolitical uncertainty over Russia’s invasion in Ukraine.

Still, some big banks believe the worst may be over for now. Strategists at UBS Global Wealth Management on Friday said the projected pace of Fed tightening was “in line with rising stock prices” and advised clients to stay invested in equities.

Earlier in the week, JPMorgan forecast the S&P 500 would end the year at 4,900, about 10% up from Friday’s close, and said markets are now “over the much-anticipated start from the Fed with policy likely to be as hawkish as it is now.” brought”.

Others are less confident. Fears that the Fed’s fight against inflation could hurt growth were evident in the bond market, where yield curve flattening accelerated following this week’s Fed policy meeting. An inverted yield curve, with shorter-dated government bond yields rising above longer-dated ones, 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 now more complicated by interest rates, they are more complicated by inflation and they are definitely more complicated by the situation in Russia,” he said. “This week there were a lot of people who thought we had bottomed out, but it’s difficult to continue to price higher and higher just on that basis.”

Many also believe the week’s sharp gains are unlikely to calm the economic concerns that have fueled bearish sentiment in recent months.

Fund managers’ cash allocation is at its highest level since April 2020, according to BofA Global Research’s monthly survey. Bearish sentiment among individual investors is nearly 50%, the American Association of Individual Investors’ latest survey showed, well above historical average of 30.5%.

“What worries us most right now…really is whether or not we’re going into a recession,” said King Lip, chief strategist at BakerAvenue Asset Management.

Concerned about a potential “stagflationary” environment of slowing growth and rising inflation, Lip’s firm invests in energy stocks, commodities and precious metals such as gold ETFs or gold mining stocks.

Cresset Capital Management recommends clients to underweight equities and increase exposure to gold, which is viewed as a safe haven asset, said Jack Ablin, Cresset’s chief investment officer.

“We’re certainly seeing a pretty aggressive Fed that has really made fighting inflation its top priority and not necessarily protecting stock market values,” Ablin said.

To be sure, signs of unbridled pessimism — such as high cash balances and poor sentiment — are often viewed as contrarian indicators that are positive for stocks. Indeed, hedge funds tracked by BoFA Global Research have recently invested in cyclical stocks, which tend to thrive when economic growth is strong.

“Despite fading optimism about global growth, customers do not appear to be bracing themselves for a recession,” BoFA strategists wrote.

Stocks have weathered interest rate hike cycles fairly well in the past. Since 1983, the S&P 500 has returned an average of 5.3% in the six months following the first Fed rate hike of a cycle, data from UBS showed.

“The Fed’s goal remains to ensure a soft landing for the economy,” the company’s analysts wrote. “We advise investors to prepare for higher rates while gaining exposure to equity markets.”

(Reporting by Lewis Krauskopf; Editing by Ira Iosebashvili and Leslie Adler) After a sizzling recovery, investors are weighing whether stocks have more bounce


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