In-depth Analysis

What Happened To Equities?

Equity markets jump as the Federal Reserve tones down hawkish language

The US Federal Reserve raised interest rates by 0.75% for only the fourth time in the last 40 years last week, as it tries to tame an inflation rate that is currently running at 9.10% per annum – so far ahead of the Fed’s own 2.0% inflation target as to effectively render it irrelevant.

US interest rates may have to rise further before the end of 2023 and there is no guarantee that inflation won’t also trend higher yet.

Added to this the US economy has moved into recessionary territory following a second consecutive quarter of negative GDP growth. None of which paints a positive picture for equity investors and traders.

And yet the Nasdaq 100 index posted a +4.6% gain on Wednesday 27th of July. 

To put that move into context it was the second largest daily gain seen in the index over the last two years.

If we think back to November and December last year and to April this year tech stocks and those that trade them were running scared of the prospects of higher interest rates.

In fact, if we look at the performance of the Nasdaq 100 index between November 29th 2021 and July 1st 2022, we find that the index lost 28.92%, well over a quarter of its value, posting a year-to-date low of 11037.21 on June 16th.

At the time of writing Nasdaq 100 was 15.23% above that low point. 

So what has happened to change investor sentiment to such a degree? 

Well, the monthly survey of Global Fund Managers from Bank of America may be able to shed some light on that. 

July’s report found what it called peak pessimism among the 293 fund managers who invest and oversee $800 billion between them.

The survey found that expectations for global growth and profits were at all-time lows and that cash levels in the manager’s portfolios were at their highest since 9/11. Moreover, the fund managers’ allocations or exposure to equities were at their lowest levels since the failure of Lehman brothers in 2008.

The report on the survey results extends to 26 pages and whilst it’s not all doom and gloom, the fund managers believe that inflation will fall and be lower in 2023 than it is currently, for example, it paints a picture of investor sentiment that’s at rock bottom.

This of course means that the only way from here is up and it was that sentiment that the market expressed after the Feds rate hike.

Bank of America also publishes a weekly summary of fund flows into various asset classes. The biggest flows last week were into cash, however, a net $5.60 billion made its way into stocks which was the first net inflow into equities for six weeks, that net figure also contained a $9.60 billion inflow to US equities.

What’s more Bank of America’s private clients, who have $2.90 trillion of assets under management remain committed to equities with an average of 62.30% of their portfolios invested in stocks, even as the bank’s bull-bear indicator remains pegged at maximum bearish, where it’s been since June 15th. 

This type of gauge is often used as a contrarian or reverse indicator particularly when they swing to extreme levels in either direction.

I think it’s too early to say that we have definitely seen the bottom in Nasdaq 100 and if we look at where its constituents are trading relative to their moving averages we find a very obvious divergence between the shorter and longer-term measures. 

This could suggest that we have rallied too far too fast and indeed the RSI 14 indicator for the index moved to overbought levels last week. In fact, on Wednesday it moved from oversold to overbought in a single session, from where it could well correct lower.

 

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