© Reuters. FILE PHOTO: A street sign marks Wall Street outside the New York Stock Exchange (NYSE) in New York City, where markets were active after Russia continued to attack Ukraine, in New York, U.S. , February 24, 2022. REUTERS / Caitlin Ochs
By Lewis Krauskopf
NEW YORK (Reuters) – Optimism is returning to the U.S. stock market, as some investors increasingly believe the economy can avoid a severe recession even as it copes with inflation. high broadcast.
The benchmark has recovered about 15% since mid-June, halving its losses so far, and heavy tech is up 20% in that time. Many of the so-called meme stocks that have suffered a drop in price in the first half of this year have rebounded, while the Cboe Volatility Index, known as Wall Street’s fear gauge, stands near a four-month low.
Over the past week, optimism hit its highest level since March, according to a survey from the American Association of Individual Investors. Earlier this year, that index fell to its lowest level in nearly 30 years, as stocks swoon over worries about how the Federal Reserve’s monetary tightening will affect the economy.
“We’ve been through a lot of pain, but views on how people are trading have become intense in the direction of half a full glass versus a full glass,” said Mark Hackett, Nationwide’s head of investment research. half empty,” said Mark Hackett, Nationwide’s head of investment research.
Data over the past two weeks reinforces hopes that the Fed can achieve a soft landing for the economy. While last week’s strong jobs report eased recession fears, this week’s inflation numbers showed the biggest monthly contraction in consumer price growth since 1973.
The change in market mood is reflected in data released by BoFA Global Research on Friday: tech stocks saw the biggest inflows in about two months over the past week, while Stocks Treasury Inflation Protection, or TIPS, used to protect against inflation, recorded the fifth straight week of outflows.
“If a soft landing is in fact possible, then you’ll want to see the kind of input we’ve seen so far,” said Art Hogan, chief market strategist at B. Riley Wealth. both would be important inputs to that theory. “
As of Thursday, the S&P 500 was up 1.5% for the week, on track for a fourth straight week of gains.
Until recently, optimism was hard to come by. Last month’s equity position was at the 12th percentile of its range as of January 2010, noted July 29 by Deutsche Bank (ETR:) analysts said, and some market participants have attributed the stock’s jump to investors quickly removing their bearish bets.
With stock market volatility dropping to multi-month lows, further support for stocks could come from volatility-tracking funds and turn bullish as market volatility fades.
Anand Omprakash, head of quantitative derivatives strategy at Elevation Securities, said volatility-targeted funds could attract around $100 billion in equity in the coming months if spins remain muted.
“If their allocation goes up, this will create a headwind for the share price,” Omprakash said.
Investors next week will keep an eye on retail sales and housing data. Earnings are also reported by some of the top retailers, including Walmart (NYSE:) and Home Depot (NYSE:), that will provide new insight into the health of consumers.
There is still a lot of anxiety in the market, with many investors still affected by the 20.6% drop in the S&P 500 in the first six months of the year.
Fed officials have pushed back on expectations that the central bank will end rate hikes sooner than anticipated, and economists have warned that inflation could return in the coming months.
Some investors have become worried about how quickly risk appetite has rebounded. The Ark Innovation ETF, a standout casualty of this year’s bear market, is up about 35% since mid-June, while shares of AMC Entertainment (NYSE 🙂 Holdings, one of the original “meme stocks” , has doubled in that time.
“You are looking at assets right now and you no longer see a lot of risk being priced in to the market,” said Matthew Miskin, co-head of investment strategy at John Hancock Investment Management.
Keith Lerner, co-chief investment officer at Truist Advisory Services, believes that technical resistance and elevated stock valuations are likely to make it difficult for the S&P 500 to move beyond the 4200-4300 level. The index was recently at 4249 on Friday afternoon.
Seasonality can also play a role. September – when the Fed holds its next monetary policy meeting – was the worst month for stocks, with the S&P 500 index losing an average of 1.04% since 1928, Refinitiv data showed.
Hogan, of B. Riley Wealth, said Wall Streeters taking a vacation through August could also sap volume and stir up volatility.
“Lighter liquidity tends to exaggerate or exacerbate moves,” he said.