There are signs that Wall Street's FOMO (fear of missing out on gains) sentiment is currently returning - a lightning fast rebound has driven the S&P 500 index up in 9 of the past 10 trading days, with a cumulative 7.2% increase in the past two weeks, making it almost the strongest period of market performance this year.
Now, whether this fierce upward trend can continue or not is about to face a crucial test of macroeconomic data this week
Undoubtedly, the enthusiasm of market participants for the long selling of the US stock and bond market in the past two weeks has been enthusiastic. Many investors have invested in funds tracking US stocks, while others have closed short trades that profit during market turbulence. Many investors have reduced their bearish bets on the S&P 500 and Nasdaq 100 indices, fearing that if the surge continues, they will be trapped.
The most obvious sign is that the Cboe Volatility Index VIX, known as the "panic index" on Wall Street, has fallen significantly from its high in October and has been declining for eight consecutive trading days. This indicates that traders are abandoning contracts similar to insurance that can protect them from stock market crashes in the coming weeks, or expect the market to remain calm.
People are trying to prepare for a year-end rebound, "said Zhiwei Ren, fixed income portfolio manager at Penn Mutual Asset Management in Pennsylvania
Ren Zhiwei stated that he has been cautious towards the market for most of this year, fearing that an economic recession is imminent. But the development of the market prompted him to reconsider his approach. Recently, he bought some call options linked to the S&P 500 index in the options market to profit from potential larger gains at the end of the year. In November, the activity of such options reached one of the highest levels on record.
Wall Street Continues Carnival
The 10-year US Treasury yield, which caused severe market turbulence this autumn, has seen a significant decline in the past few weeks after breaking the 5% mark for the first time in 16 years, providing the most solid ammunition for stock market bulls. The S&P 500 index has risen by 15% so far in 2023, while the Nasdaq Composite Index rose by 32% after its best single day performance since May last Friday.
T Charles Shriver, portfolio manager at Rowe Price, manages approximately $50 billion in assets. He stated that for most of this year, a significant portion of his investment portfolio was cash, and took advantage of the market crash in October to invest a portion of his funds in the stock market. He expects the stock market to continue to rise. We will look for opportunities to increase our holdings in stocks, "Shriver said.
According to LSEG Lipper Global Fund traffic data, US stock ETFs and mutual funds attracted approximately $4.2 billion in funds in the week ended November 8th, making it one of the largest inflows of funds this autumn.
Meanwhile, according to data from the US Commodity Futures Trading Commission (CFTC), hedge funds and other fund managers' bearish bets on the S&P 500 index have recently dropped to their lowest level since June 2022. The bet on the Nasdaq has also dropped to its lowest level since March.
Retail investors are also increasingly optimistic about the stock market. A survey by the American Association of Individual Investors showed that last week, the proportion of investors who expected the stock market to rise in the next six months jumped to 43%, a significant increase from 24% a week ago; The proportion of bears has almost halved to 27%.
Goldman Sachs economist Jan Hatzius has always been one of the most optimistic people on Wall Street about the US economy. In a recent report to clients, he stated that the performance of the US economy was even better than his expectations, and he expects inflation to continue to decline next year.
The test of reality is coming
Of course, whether the Wall Street frenzy of the past two weeks is reasonable or not may face a reality test this week - multiple key US economic indicators, including the US October CPI, will be released in the coming week. As the Federal Reserve repeatedly emphasizes that its future direction will depend on economic data, the performance of these data is likely to be significant.
Among them, the US Bureau of Labor Statistics will release its October CPI report on Tuesday. At present, the industry expects the year-on-year growth rate of the US CPI in October to slow down from 3.7% to 3.3%, and the month on month growth rate is expected to decrease from 0.4% to 0.1%; The core CPI for October is expected to remain unchanged at 4.1% year-on-year and 0.3% month on month.
Industry insiders point out that although the overall CPI data is expected to decline this time, reversing the trend of re heating in the past few months, the core CPI still seems unable to get rid of the troubles of the "Four Times", and may even end the previous six consecutive months of decline, which may undoubtedly cast a shadow over the Federal Reserve's anti inflation prospects once again. Federal Reserve Chairman Powell stated last week that the Fed will not announce the end of its historic rate hike until there is more evidence that inflation is cooling.
Although Powell did not argue for a rate hike now, he pointed out earlier inflationary "feints", where inflationary pressures had weakened in the past few times but then rebounded again, surprising Federal Reserve officials. Powell said they will closely monitor the economic situation to avoid the risk of being misled by months of good data, as well as the risk of excessive interest rate hikes.
The Federal Reserve has raised interest rates to their highest level in 22 years this year, aiming to combat inflation by slowing economic activity. Officials extended the suspension of interest rate hikes at last week's meeting, marking the first time they have held interest rates unchanged in consecutive policy meetings since the start of rate hikes in March 2022. The next meeting of the Federal Reserve will be held from December 12th to 13th.
In addition to Tuesday's CPI data, the market will also shift its attention to the latest US retail sales report, Producer Price Index (PPI), initial jobless claims, and other data releases for the rest of this week to measure the health of the US economy.
After last week's speeches by as many as double digit Fed officials, this week's speech schedule for Fed officials is still fully arranged. A series of key economic data and speeches by important central bank officials are likely to further affect the market's judgment on the direction of the Federal Reserve's interest rates.
This may also indicate that despite the welcome rebound in the US stock and bond markets over the past two weeks, investors are not yet at a time to relax as more 'tough battles' are about to begin.