{"id":27288,"date":"2023-06-25T12:46:53","date_gmt":"2023-06-25T16:46:53","guid":{"rendered":"https:\/\/ifintechworld.com\/markets\/why-the-easy-money-has-been-made-in-the-stock-market-rally-and-what-comes-next\/"},"modified":"2023-06-25T12:46:55","modified_gmt":"2023-06-25T16:46:55","slug":"why-the-easy-money-has-been-made-in-the-stock-market-rally-and-what-comes-next","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=27288","title":{"rendered":"Why the \u2018easy money\u2019 has been made in the stock-market rally \u2014 and what comes next"},"content":{"rendered":"
A revitalized 2023 stock-market rally finally ran out of fizz last week. And it might take some time to get back on track in the face of a dip in market liquidity and signs that a surge of buying fueled by \u201cfear of missing out\u201d has largely run its course.<\/p>\n
\u201cWe don\u2019t think the rally is over, but it may be difficult\u201d for it to proceed in coming weeks \u201cwith liquidity coming out of the system,\u201d said Michael Arone, chief investment strategist for the U.S. SPDR Business at State Street Global Advisors, in a phone interview.<\/p>\n
\n
He pointed to a \u201ctrifecta\u201d of events that have or will likely continue to sap liquidity:<\/p>\n
\n
\n Quarterly estimated corporate taxes were due beginning June 15. Those payments come out of bank demand deposits and go to Treasury, taking liquidity out of the financial system.<\/p>\n<\/li>\n
\n The Treasury Department continues to issue T-bills to rebuild the Treasury General Account, which was depleted ahead of the resolution of the debt-ceiling showdown in Congress in early June. While around half the demand has come from cash parked by money-market funds in the Federal Reserve\u2019s reverse repo facility, the other half is coming out of bank deposits, adding to the drain on liquidity, Arone said.<\/p>\n<\/li>\n
\n The Fed\u2019s so-called quantitative tightening process, in which the central bank allows Treasurys and mortgage-backed securities to roll off its balance sheet without reinvesting the proceeds, is set to drain another $55 billion from the system in coming weeks. <\/p>\n<\/li>\n<\/ul>\n
The S&P 500 index \n SPX, \n -0.77%<\/bg-quote> \n fell 1.4% last week, ending a streak of five consecutive weekly gains after settling at a 14-month high alongside the Nasdaq Composite \n COMP, \n -1.01%<\/bg-quote> \n on June 15. The Nasdaq pulled back 1.4% last week, while the Dow Jones Industrial Average \n DJIA, \n -0.65%<\/bg-quote> \n shed 1.7%. It was the biggest weekly decline for all three major indexes since the week ending March 10, according to Dow Jones Market Data.<\/p>\n
The setback was seen by many analysts as overdue given the S&P 500\u2019s nearly 15% rally off its 2023 closing low set on March 13. The rally has also been notoriously narrow, led by a handful of megacap tech stocks, with those gains supercharged by a frenzy for artificial-intelligence-related plays.<\/p>\n
\u201cThe rapid move in equities has created overbought conditions, and arguably has gone \u2018too far too fast,\u2019\u201d said Mark Hackett, chief of investment research at Nationwide, in a note. \u201cThis sets the stage for a pause or consolidation of the gains in the near term, though as we approach second-quarter earnings season, we are reminded that the fundamental picture is substantially better than feared.\u201d<\/p>\n
Need to Know: <\/strong>The AI boom will stay with the S&P 500, says one of most pessimistic Wall Street firms heading into 2023<\/p>\n
Meanwhile, much of the buying that helped fuel the surge appeared to come from fund managers and other professional investors who had missed out on the rally \u2014 a phenomenon known as the \u201cpain trade.\u201d<\/p>\n
\u201cA large part of the last month-plus has been FOMO, meltup, short-covering \u2014 choose your clich\u00e9 as you see fit,\u201d said Huw Roberts, head of analytics at research platform Quant Insight. FOMO is an acronym for \u201cfear of missing out.\u201d<\/p>\n
For professional money managers, that fear can be fueled by disappointed clients and bosses.<\/p>\n
\u201cYou can miss out on one month\u2019s performance but we all know the significance of fixed calendar points,\u201d Roberts told MarketWatch, referring to the looming end of the month, quarter, and first half. \u201cFor any money manager still underweight tech, how do you justify your fees in that scenario?\u201d<\/p>\n
The S&P 500 rally has come alongside improving macro fundamentals, Roberts said. The gains, however, have outpaced the improvement by the macro backdrop, likely a result of that catch-up buying, much of which appears to have run its course, Roberts said. <\/p>\n
Meanwhile, Quant Insight\u2019s macro-based model sees fair value for the S&P 500 near 4,350, slightly below its current level and likely justifying near-term consolidation, he said (see chart below).<\/p>\n
<\/p>\n<\/p>\n<\/figure><\/div>\n
What will it take for the rally to resume?<\/p>\n
Arone argued that the S&P 500\u2019s breakout above previously stout resistance around 4,200 came after the resolution of the debt-ceiling showdown averted a potentially catastrophic federal default. <\/p>\n
Market participants also thought the stage was set for a lengthy \u201cpause\u201d in interest rate rises by the Federal Reserve and had grown increasingly sanguine about the ability of the economy to avoid a deep recession. <\/p>\n
See: <\/strong>Economist who anticipated bank failures this spring says U.S. recession may be just around the corner<\/p>\n
The Fed did leave interest rates unchanged at its June meeting, but a lengthy pause now looks unlikely after Chair Jerome Powell reiterated this week that a \u201cstrong majority\u201d of policy makers see two more quarter percentage point rate hikes in the pipeline. <\/p>\n
Read: <\/strong>Bond-market recession indicator is saying \u2018trouble ahead\u2019 for U.S. economy<\/p>\n
Now, investors are worrying about whether a pair of interest rate hikes \u201cwill either bring the timeline of recession forward or make it worse,\u201d Arone said. \u201cClarity on these things is critically important.\u201d<\/p>\n
Check out<\/strong>: U.S. stocks head for punishing selloff as \u2018unknown unknowns\u2019 could drag market lower, JPMorgan analysts warn<\/p>\n
State Street sees room for stocks to extend the rally later this year, but expects a bumpier path in the near term. <\/p>\n
And for the rally to be sustained, it will need to broaden out. While breadth has improved somewhat in recent weeks, the equalweight measure of the S&P 500 remains up just 3.4% so far this year versus the gain of more than 13% for the market-cap-weighted index.<\/p>\n
That means more gains are required for cyclically oriented stocks, small-cap stocks, value stocks and other parts of the market that have lagged well behind the tech-oriented rally, Arone said. Those stocks are more economically sensitive, underlining the importance of clarity on the outlook for the economy and the threat of a recession.<\/p>\n
The week ahead is relatively light on U.S. economic data, but does feature personal-consumption expenditures index for May on Friday, which includes the Fed\u2019s favored inflation measure.<\/p>\n
Don\u2019t miss: <\/strong>Option demand explodes in June as investors use bullish bets to chase stock-market rally <\/p>\n<\/p><\/div>\n