[ad_1]
This is not the situation Wall Street was expecting in 2024.
Investors, emboldened and bullish after a robust holiday rally, are now overwhelmed with old concerns in the new year, including new questions about the direction of Federal Reserve policy. It was included. The result has been a decline in overall assets that is greater than at any other time of the year in at least the past two decades. The S&P 500 fell for the first time in 10 weeks, ending its longest streak of gains in nearly 20 years. Government bonds and corporate credit fell sharply for the first time since October.
Friday’s better-than-expected jobs report could further cloud the outlook for traders ahead of a rate cut in March. But the seeds of disillusionment were sown weeks ago, with investors abandoning bearish bets and diving into all manner of risk assets. With new buyers in short supply, bulls have had to contend with a nagging feeling that December’s euphoria has gone too far.
Indeed, history has shown that not much can be gleaned from a few days of trading about how this year will unfold. Still, the volatility is yet another reminder of the dangers of overconfidence when forecasting interest rate-sensitive strategies, especially after a year in which Wall Street’s efforts to predict market movements have been disastrous. It became a thing.
“Investors were complacent and were hoping for a hat trick of slowing inflation, steady job growth and rising earnings,” said Michael Bailey, director of research at FBB Capital Partners. “We’ve had some bulls muzzled this week.”
All major asset classes fell during the holiday-shortened week, a reversal from all the gains in the final months of 2023. Widely followed exchange-traded funds (ETFs) that track stocks and bonds have fallen at least 1.5% in the first four sessions, the worst in a year since the creation of two popular bond ETFs in mid-2002. The pan-market slumped.
Headwinds such as Apple’s rating downgrade and a flood of corporate bond issuances weighed on the market, but investors’ complacency, particularly around central bank policy, was a major accelerant. In the bond market, traders were betting the Fed would cut interest rates in March in late December. The implied probability has now been reduced to around 70%. For all of 2024, swaps imply a total rate cut of 137 basis points, compared with about 160 basis points last Wednesday. Much the same pattern developed in Europe.
The repricing pushed the 10-year Treasury yield back to 4%, reversing more than half of its decline since Dec. 13, when Fed Chairman Jerome Powell laid the groundwork for monetary easing later this year. Unbalanced placement is easy to point out. Net purchases by customers in the U.S. Treasury market soared to the highest level since 2010 in November, but have since tapered off, according to research from JPMorgan Chase & Co.
“People jumped on what appeared to be a sea change and wanted to move on from the fact that interest rates were no longer going up,” Alan Raskin, chief international strategist at Deutsche Bank, said on Bloomberg TV. “I think it made sense, but then the market got ahead of us. Now we’re exiting.”
The stock market rebounded after a series of purchases that had Wall Street contrarians worried. Total inflows into U.S. stock ETFs reached 0.18% of market capitalization on a four-week basis, the highest level in seven years, according to data compiled by Ned Davis Research.
Hedge funds, which resisted profit-seeking in November, gave in last month, with net flows turning “significantly positive,” according to prime brokerage data compiled by JPMorgan. Although the broad exposure has not yet reached extreme levels, the quick bullish turn has caused alarm within John Schlegel’s team.
Of particular concern was the pace at which fund clients were unloading bearish bets. The amount of short covering since late October has been higher than at any time since 2018, excluding the pandemic rebound in March 2020. Similar events tend to herald an impending downturn, with the S&P 500 dropping an average of 5% to its bottom the following month. discovered by Schlegel et al.
Goldman Sachs Group’s Tony Pasquariello also observed an explosion of optimism. He estimated that the Fast Money community’s equity exposure ranged from -8 to +8 on a scale of -10 to +10 from October to December.
“Certainly there is plenty of room for inaccuracy, but I can say this with confidence that it will be very difficult to see how the spec fleet will be able to maintain the firepower deployed in November and December in January. “It’s difficult,” said company director Pasqualiello. He wrote in a memo about hedge fund coverage.
Unwavering optimism played a role in the market crash, which occurred in the absence of significant macroeconomic inputs until Friday. This suggests that the decline can be taken at a discount. In addition to fourth-quarter earnings reports from companies, three measures of consumer prices are expected before monetary officials convene in March, often providing an opportunity for updated guidance for next year. Masu.
As always, the path to profit remains paramount for stock investors. Analysts now expect overall S&P 500 growth to be nearly 11%, reflecting double-digit growth in healthcare, industrials, technology and communications services companies. U.S. large-cap stocks trade at 19.6 times their estimated value, a high but not unprecedented valuation compared to recent years.
“I actually think the technicals in the stock market are great,” Rick Rieder, BlackRock’s chief investment officer for global fixed income, told Bloomberg TV. “You can buy some stocks that trade at 3 times cash flow and 7 to 10 times earnings.”
Viewed through the lens of positioning, the situation is probably still bearish. JPMorgan’s model, which tracks money supply and asset holdings in different countries, shows that investors, from individuals to pensions to asset managers, are holding cash as a percentage of their overall portfolios, declining towards a low point at the end of 2021. I showed that I was doing it. JPMorgan strategists, including Nikolaos Panigirtzoglou, say this is both a function of the rise in stocks and bonds and an indication of a decline in underlying purchasing power.
“Our indicators currently indicate an uptick in equity and fixed income positioning,” they wrote in a note. “The liquidity cushion for further expansion of financial assets is currently too low, which could create downside risks for both stocks and bonds going forward.”
[ad_2]
Source link
