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Why the stock market’s ‘FOMO’ rally stalled and what will determine its fate


A tech-led stock market rally has stalled over the past week as investors began to heed what the Federal Reserve has told them.

However, the bulls see an opportunity for the stock to continue to rise as institutional investors and hedge funds catch up after cutting or shorting stocks during last year’s tech crash. The bears say the labor market remains hot and other factors will force interest rates even higher than investors and the Fed expect, echoing the momentum that has driven market action. school in 2022.

Financial market participants over the past week have moved closer to pricing in what the Federal Reserve has told them: the federal funds rate will peak above 5% and will not be cut in June. 2023. Federal fund futures as of Friday have been priced at a top rate of 5.17% and year-end rate of 4.89%, said Scott Anderson, chief economist at Bank of the West, noted in a note.

After Fed Chair Powell’s February 1 press conference, the market still expects the federal funds rate to peak at just 4.9% and end the year at 4.4%. A sizzling January jobs report released on February 3 helped turn the tide, along with a jump in the Institute of Supply Management’s services index.

Meanwhile, 2-year Treasury yields are sensitive to policy
TMUBMUSD02Y,
4.510%

has risen 39 basis points since the Fed meeting.

“These strong interest rate moves at the bottom end of the yield curve are a big step in the right direction, markets are already starting to listen, but rates still have a way of reflecting current conditions,” Anderson writes. in”. “The Fed rate cut in 2023 is still a long way off, and strong economic data for January makes that chance even less.”

Soaring short-term yields are a message that appears to have worried stock market investors, sending the S&P 500
SPX,
+0.22%

with worst weekly performance in 2023, while Nasdaq Composite spiked before that
COMPUTER,
-0.61%

won a streak of five consecutive weekly gains.

That said, stocks are still going up smartly into 2023. Bulls are growing in numbers, but not so common that they pose a contrarian threat.

In a mirror image of the 2022 market meltdown, previously beaten tech-related stocks rallied strongly back into early 2023. The tech-heavy Nasdaq Composite is still up nearly 12% in the year. New Year, while the S&P 500 rose 6.5%. Dow Jones Industrial Average
DIA,
+0.50%
,
outperformed its peers in 2022, lagged again this year, growing only 2.2%.

So who is buying? Individual investors have been relatively active buying since last summer before stocks hit October lows, while options activity skews more, said Mark Hackett, chief investment officer. about buying a call when traders bet on the price of the market, rather than on the defensive by buying a put. research at Nationwide, in a phone interview.

See: Yes, retail investors are back, but for now they only have their eyes on Tesla and AI.

Meanwhile, analysts say institutional investors enter the new year with a lower weighting of stocks, particularly in the technology and related sectors, compared to their benchmarks following: massacre last year. That created an element of “FOMO” or fear of missing out, forcing them to catch up and fuel the rally. Hedge funds were forced to release short positions, while increasing profits.

“What I think is the key to the next move in the market is will institutions spoil retail sentiment before retail sentiment ruins institutional downtrend?” Hackett said. “And I bet the institutions will look and say, ‘hey, I’m a few hundred basis points behind me. [benchmark] right away. I had to catch up and being short in this market was so painful.”

However, the past week contained an unwelcome negative 2022 balance. Nasdaq led the bears and Treasury yields supported. Yield of 2-year bond
TMUBMUSD02Y,
4.510%
,
which is particularly sensitive to expectations for Fed policy, rose to its highest level since November.

Options traders hedge against the possibility of a short-term spike in market volatility.

Read: Traders brace for a boom as costs of protecting US stocks hit their highest level since October

Meanwhile, a hot labor market punctuated by the January jobs report, along with other signs of a recovering economy, are raising concerns that the Fed may have more work to do than those in need. what their officials are currently expecting.

Some economists and strategists have begun to warn of a “no landing” scenario, in which the economy experiences a recession, or a “hard landing”, or even a slight deceleration, or “soft landing”. While that sounds like a pleasant scenario, there is concern that it will force the Fed to raise rates even higher than policymakers are currently expecting.

“Interests need to go higher and that’s not good for technology, not good for growth [stocks] and not good for Nasdaq,” Torsten Slok, chief economist and partner at Apollo Global Management, told MarketWatch earlier this week.

Read: Wall St.’s leading economist. says ‘no landing’ scenario could trigger another tech-led stock market sell-off

So far, however, stocks have largely held their own in the face of a fall in Treasury yields, noted Tom Essaye, founder of Sevens Report Research. That could change if the economic picture worsens or inflation picks up again.

Stocks have largely held out against the rise in yields, he said, as strong jobs data and other recent figures gave investors confidence that the economy can handle high interest rates. than. If the January jobs report proves to be an illusion or other data deteriorates, that could change.

And while market participants have shifted their expectations more in line with the Fed, policymakers have yet to shift targets, he noted. They are more belligerent than the market, but no more belligerent than they were in January. If inflation shows signs of increasing again, the notion that the market has taken into account “extreme aggression” will be discarded.

Needless to say, much attention is being paid to the release of the January consumer price index on Tuesday. Economists surveyed by The Wall Street Journal expect CPI to rise 0.4% month-on-month, which would send the annual rate down to 6.2% from 6.5% in December after hitting a high the highest in about 40 years is 9.1%. last summer. The prime rate, which excludes volatile food and energy prices, is expected to fall to 5.4 percent year-on-year from 5.7 percent in December.

“For stocks to continue rising as interest rates rise, we need to see: 1) CPI does not show a price recovery and 2) key economic indicators show stability. “If we get the opposite, we need to be prepared for more volatility.”

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