Happy Days
“Happy days are here again! The skies above are clear again, Let us sing a song of cheer again, Happy days are here again!” - Annette Hanshaw
It appears happy days are here again based on how the market is trading. In the last two weeks, stocks, as measured by the S&P 500, have gone up 200 points, or a little over 5%, due to the general perception that the Fed is near the end of rate hikes and entering the long-awaited “pivot.”
To be fair, macro funds have been driving much of the trading over the past six plus months as they ride the momentum shifts in equity prices. These managers have been very successful at trading these moves, as the macro returns from last year show. All this to say, much of this current uptrend might be short-term-momentum traders still driving market action. Upside volume has been pretty light, and the big volume spikes have been to the downside. Rallies are typically characterized by the opposite: trading volume increases as prices rise and decreases as prices fall. The current market action is much more indicative of macro trading as opposed to everyday investors jumping back into stocks wholeheartedly. As a result, we will be tracking trading volume to see if it reverts back to the traditional bull market pattern. If it does, that will indicate the current market rally is sustainable.
One other thing to keep in mind is Fed sentiment and stock price movement related to Fed policy. Stocks, which are reflecting a rosier picture of the economy, tend to counteract the Fed’s objective of reining in inflation. Therefore, the Fed may be forced into talking the markets down to keep asset prices in check and move inflation in the direction they want, which is down. This might mean the Fed may have to be more aggressive than current expectations to curb asset prices. At Pave, we believe a 50-basis-point rate increase from the Fed is much more likely than the 25-point move most are expecting.
Should the Fed raise rates by 50 basis points at the next meeting, we will get another steep drop in stock prices. This potential drop in stocks will put equity prices much more in line with where they should be based on the fundamentals of the economy and company profitability in this current cycle. However, a reasonable amount of tension remains between where investors want stock prices to be and where they should be, leading to increased volatility.
Best,
Pave Team