For all banks collapsing, bond yields plunging, hammering in oil and mining stocks and day-in, day-out volatility, Adam Sarhan puts this week in the winning column.
Why?
“The stock market had a chance to crater, but it didn’t,” said Sarhan, the book’s author Psychological Analysis: How to Make Money, Beat the Market, and Join the Smart Money Circle and founder of 50 Park Investments. “It’s bullish.”
Whether that endures rests largely in the hands of the Federal Reserve, whose attitude toward interest rates is the cause of all the turmoil — and perhaps the calm.
The S&P 500 rose 1.4% and the tech-heavy Nasdaq 100 rose 5.8% for its best week since November despite a key Fed meeting and a ninth straight rate hike. But after a year of concerns about central bank monetary policy tightening, investors now see more rate hikes as a sign of confidence in the economy and financial system.
“Some people think that the equity market is going to gain a lot if the Fed doesn’t raise rates,” said Mimi Duff, managing director at GenTrust. “For the plane to land, there will be some turbulence.”
Although the crisis of confidence in the US banking system is troubling investors, movements in the Cboe Volatility Index do not necessarily indicate that. The VIX, Wall Street’s main gauge of fear, closed at 25.5 on Friday, below its average level last year. And looking at the so-called skew of the VIX also shows that anxiety is starting to subside.
The cost of protection against gains in the VIX next month has decreased since March 10, when the crisis in the banking system became apparent. Volatility implied in the betting contract that fell on the fear gauge over the next month has risen.
Long Technique
Sarhan of 50 Park is a long U.S. equity in the near term, including technology and growth stocks like chip stocks and some brokerage firms, such as Charles Schwab Corp. and Apple Inc. which is known for its stability and strong cash flow. The Russell 1000 Growth Index jumped 4.1% this week while its value pair fell 1.7%, the largest gap between the two since 2001.
Despite all the turmoil in the banking sector, markets do not expect the Fed to be dovish. Traders expect a quarter-point increase next week to a range of 4.75% to 5%. They also expect policy rates to peak in May.
The catch for stock growth is that inflation remains an obstacle, meaning the Fed will likely be pressured to keep hiking well beyond Wednesday’s meeting, said Brian Frank, portfolio manager of the Frank Value Fund. He recommended buying beaten-up energy stocks – usually seen as hedges against inflation – after the group shed 7% last week as US oil prices fell.
The main focus for investors will be the Fed’s guidance for next month. In particular, they will be looking for changes in the latest quarterly rate projections, known as dot plots, after some officials suggested it might be appropriate to slow increases if wage growth cools, which signs show they will.
Economists at Barclays Plc led by Marc Giannoni estimate that the average dot plot will show a peak in 2023 of 5.1%. This is in line with what officials predicted at the December meeting.
“The market rallied at several points this week, actions like SVB and Credit Suisse were one-off and the banking system can tolerate that, but I do not agree,” Frank. “I’m a bit sleepy about it. I’m still not sure it’s all good. I haven’t bought a bank stock since 2008.”