(Bloomberg) — For all the bank collapses, sinking bond yields, plunging oil and mining stocks and day-to-day volatility, Adam Sirhan put this week in the win column.
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Why?
“The stock market had every chance to crater, but it didn’t,” said Sirhan, 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. “It’s fast.”
Whether flexibility persists or not is largely in the hands of the Federal Reserve, whose attitude toward interest rates is the root cause of all the turmoil – and may be what calms it.
The S&P 500 rose 1.4% and the tech-heavy Nasdaq 100 rose 5.8% for its best week since November, even as a key Fed meeting approaches and a ninth straight rate hike is expected. But after a year of central bank monetary policy tightening, investors now view further rate hikes as a sign of confidence in the economy and financial system.
“Some people think the equity market will take it very badly if the Fed doesn’t raise rates,” said Mimi Duff, managing director at GenTrust. “For the plane to take off, there’s going to be some turbulence.”
Even though a growing crisis of confidence in the US banking system spooked investors, moves in the COBBO Volatility Index did not necessarily reflect that. The VIX, Wall Street’s major fear gauge, closed at 25.5 on Friday, well below last year’s average. And a look at the so-called skewness of the VIX also shows that concern is starting to subside.
The cost of protecting against gains in the VIX over the next month has been falling since March 10, when the crisis in the banking system became apparent. Implied volatility has increased in contracts betting on a decline in the fear gauge over the next month.
long take
Sirhan of 50 Parks is long US equities in the near term, including bad tech and chip stocks such as Growth Shares and some brokerage firms such as Charles Schwab Corp. Investors are buying classic tech growth companies like Microsoft Corp, Alphabet Inc. and Apple Inc. Which are known for their stability and strong cash flow. The Russell 1000 Growth Index jumped 4.1% this week, while its value counterpart sank 1.7%, the widest gap between the two since 2001.
Even with all the turmoil in the banking sector, the markets are not expecting a sudden dovish stance from the Fed. Traders are expecting a quarter-point hike in the range of 4.75% to 5% next week. They also forecast the policy rate to peak in May.
Holding inflation remains a hindrance for growth stocks, said Brian Frank, portfolio manager at Frank Value Fund, which means the pressure on the Fed will be hiking well after Wednesday’s meeting. He suggests buying beaten-down energy stocks — typically seen as a hedge against inflation — after the group fell 7% last week as US oil prices plunged.
The main focus for investors will be the Fed’s guidance for the coming months. In particular, they will look for any changes in the latest quarterly rate estimates, known as a dot plot, that some officials have suggested could slow the pace of growth if wage growth cools. may be appropriate, which is showing signs of doing so.
Economists at Barclays PLC, led by Mark Gianoni, forecast that the middle of the dot plot would show a peak of 5.1% in 2023. That’s in line with what officials projected at their December meeting.
“The markets rallied at certain points this week, acting like SVB and Credit Suisse were outright and the banking system can tolerate it, but I disagree,” Frank said. “I’ve lost some sleep over this. I still can’t believe everything is okay. I haven’t bought a bank stock since 2008.”
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