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Market suddenly ignoring “higher for longer”

Traders are defying the age-old Wall Street mantra, “never fight the Fed,” which might ignite a rally in overlooked stock market sectors.

Despite clear Federal Reserve signals and central banker comments indicating that interest rates will remain elevated longer than anticipated, with the median forecast predicting only one rate cut this year, traders are betting on stocks that thrive with lower borrowing costs. Data from EPFR Global and Bank of America shows a significant $2.1 billion inflow into the technology sector this week, the highest since March.

“The market isn’t convinced that inflation and labor market data will restrict the Fed from making multiple cuts this year,” said Keith Buchanan, senior portfolio manager at GLOBALT Investments. “This resistance is sustaining an environment that favors risk assets.”

 

The FED, the rates, and the market

 

Even with the Fed’s projections for fewer rate cuts and Fed Chair Jerome Powell’s seemingly hawkish remarks at his recent press conference, the S&P 500 Index surged past 5,400 for the first time ever on Wednesday and maintained that level through Friday. Since its October 2022 low, the benchmark has risen over 50%, recovering from a bear market sparked by the Fed’s aggressive interest rate hikes starting in March 2022 to combat soaring inflation.

 
FED arguments over the market
 

Investors now ponder the market’s reaction when the Fed eventually decides to cut rates.

Historically, rate cuts have often signaled a turning point, leading to strong equity returns — provided they aren’t precipitated by a recession. This likely explains why Bank of America and EPFR Global’s latest data shows a shift into financials, materials, and utilities — sectors closely linked to the economy that typically benefit from rate cuts during periods of robust growth.

Economic growth is expected to remain solid, with the Atlanta Fed’s GDPNow model forecasting a rise in second-quarter real GDP growth to 3.1% annually, up from a 1.3% pace in the first quarter.

“There are minimal indicators suggesting a significant economic downturn,” said Carol Schleif, chief investment officer at BMO Family Office.

 

Tech Surge

 

Fund managers are increasing their stakes in tech stocks. The Nasdaq 100 Index has risen 17% in 2024. The top seven companies in the S&P 500 are trading at an average of 36 times projected profits, compared to a multiple of 22 for the overall index, based on Bloomberg data.

Aggregate equity positioning has reached its highest point since November 2021, when the Nasdaq 100 peaked, according to Deutsche Bank AG’s data through the week ended June 14.

This week’s rise was driven by rules-based and discretionary investors — those who use predefined criteria and algorithms to make decisions — with significant increases in tech and rate-sensitive sectors like utilities, staples, and real estate.

If the Fed adopts a more dovish stance, defensive market segments that offer steady dividends, such as consumer staples and real estate, will become more appealing, noted Terry Sandven, chief equity strategist at US Bank Wealth Management.

June typically brings a lull in market activity due to lower trading volumes leading into summer. However, next week might be an exception due to “triple witching,” where contracts tied to stocks and indexes expire on Friday, coinciding with the quarterly rebalancing of indexes. This convergence often results in a surge of volatility and trading volumes, potentially disrupting short-term positioning.

“Next week could be quite eventful for equities,” said Frank Monkam, senior portfolio manager at Antimo.

 
 





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