Bull market or fool market? Investors say the latter

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The stock market has made incredible strides since the downturn last year—so much so that it’s hard to believe the economy could be on the brink of recession.

At the market’s close on June 16, 2022, the S&P 500 was at around 3,666.77, weighed down by persistent inflation, Federal Reserve rate hikes and geopolitical tensions.

The broad-based index is at 4,409.59 at the close on June 16, 2023 – marking a roughly 20% increase from a year earlier despite the collapse of regional banks, a narrowly avoided debt default and the Fed’s continued fight against inflation.

Mega-cap tech stocks hit by rising interest rates in 2022 have also seen huge gains this year. Shares in Apple hit a record high of $186.01 last Thursday, compared to $135.43 a year earlier.

For the year, the S&P 500 is up about 15%, the Dow is up 3.5% and the Nasdaq Composite is up 30.8%.

But the rally’s recent acceleration portends some pain ahead, investors say.

“The market is behaving quite erratically,” said Amanda Agati, chief investment officer at PNC Financial Services Asset Management Group. “A lot of what’s happening right now may very well be that it’s kind of the last hurray, the last gasp before we tip into contraction.”

There are already signs that cracks are forming and may soon widen. The Federal Reserve kept interest rates steady on Wednesday, but indicated it could raise interest rates two more times this year. That initially triggered a steep selloff before investors quickly shrugged off the Fed’s hawkish signal, and stocks marched back up by Wednesday’s close. Shares fell slightly on Friday, but still ended the week up.

There are several signs that the market, at least for the time being, is about to be torn apart.

S&P 500 reaches bull market territory and new highs

In late May, Congress’ passage of the debt ceiling deal (later signed into law by President Joe Biden) and a blowout quarter from chipmaker Nvidia pushed higher tech names on megacaps, helping stocks break through the trading range they had been stuck in for months. .

Then earlier this month, the S&P 500 entered a bull market, up more than 20% from last October’s low. The broad-based index closed Thursday at its highest level since April 2022.

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Market breadth is improving

Market breadth has improved recently, as the S&P 500 rally has extended from technology stocks to other parts of the market, including industrials, materials and financials.

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That’s an encouraging sign for investors worried that the S&P 500’s gains this year have been largely dominated by mega-cap tech stocks, boosted by a flight to safety in the face of economic uncertainty and by artificial intelligence excitement.

Teknikaksjers’ record run

Apple shares closed at a record high on Thursday, approaching a market value of $3 trillion. It comes after the stock hit an intraday record a week earlier, the day the company unveiled its mixed reality headset Vision Pro at its annual developer conference.

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Shares in the technology company rose around 42% for the year.

Dan Ives, an analyst at Wedbush Securities, expects Apple shares to reach a price target of $240 by next summer and that the company will reach a market value of $4 trillion closer to 2025, citing the hype surrounding AI and the potential for a record-breaking product. cycle for a new iPhone model expected to be released this fall.

“There is no better stock to own in technology than Apple … despite an economy that remains somewhat cloudy,” Ives said.

Meanwhile, Microsoft shares also hit a record high, closing at $348.10 on Thursday.

The rally’s next test

Despite some bullish signs in the market, investors say the math doesn’t add up to a sustained rally — especially with a possible recession on the horizon.

And while the market’s breadth has widened in recent weeks, mega-cap tech stocks are still responsible for the lion’s share of the gains, potentially leaving the rally on shaky legs. There is still concern on Wall Street that the market’s run has been exaggerated.

“The valuation of some of these moves is like Icarus flying too close to the sun,” said Richard Steinberg, market strategist at The Colony Group.

Also, the 2-year and 10-year Treasury yields remain inverted, a phenomenon that has historically preceded economic downturns.

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The next test for stocks will likely be the Fed’s next rate decision, according to Agati. Chairman Jerome Powell said last Wednesday that the July meeting will be “live,” meaning the decision will be up for debate.

“We believe that the Fed will take another step to further tighten policy in July, and that could ultimately be the catalyst that creates a market correction,” Agati said.

Still, some investors remain bullish, even if they expect some short-term pain ahead.

“I think we’ll probably end the year up versus down,” said Sylvia Jablonski, managing director and chief investment officer of Defiance ETFs. However, “I don’t necessarily think we’re going to get another 20%, 30% or anything like that out of the Nasdaq.”

The Federal Reserve was more hawkish than expected at its June meeting. The investors didn’t seem to care.

Last Wednesday, the central bank put interest rates on hold and indicated that it could raise interest rates twice more this year. Investors largely ignored the announcement, with stocks continuing to rise in the days that followed.

Then Fed Governor Christopher Waller and Richmond Fed President Thomas Barkin said last Friday that the central bank needs to raise interest rates more to tame inflation.

“We see that the key interest rates have some effects on parts of the economy. The labor market is still strong, but core inflation is simply not moving, and it will probably require a bit more tightening to try to get it to go down, Waller said at an event in Oslo.

The tough Fed speech on Friday rattled investors somewhat, sending stocks down. But all three major indexes still rose for the week.

There are two reasons why the market’s rally continued this week despite the Fed’s hawkish signals, says Sarah Henry, portfolio manager at Logan Capital Management. First, Wall Street has decided that there isn’t much difference between one or two more rate hikes.

Whether the Fed raises rates one or two more times will be less relevant than the increases markets have already seen, Henry said. “Predictability (of Fed rate decisions) is going to be more important than incrementality at this point.”

In addition, a number of recent robust economic readings have convinced investors that even if the economy tips into a recession, it will be short and shallow, says Henry.

Here is some of that data:

The rally’s momentum also stems from positive investor sentiment, particularly from secular trends like artificial intelligence that have driven mega-cap stocks to stratospheric heights this year, according to Paul Eitelman, North America investment strategist at Russell Investments.

“It almost seems like all news is good news right now for the last few weeks – we’ve been rallying on a hawkish Fed,” Eitelman said. “We’re seeing market psychology change quite noticeably.”

Still, investors can get ahead. “The message that we get from the Federal Reserve should be to send a cautious tone to the stock markets,” he said.

Monday: The US stock market closed for Juneteenth.

Tuesday: Building permits and new homes start in May.

Wednesday: Federal Reserve Nomination Hearings.

Thursday: National Association of Realtors Existing Home Sales for May, Jobless Claims, Mortgage Interest Rates and US Leading Economic Indicators for May. Federal Reserve Chairman Jerome Powell presents his semiannual monetary policy report to the Senate Banking Committee.

Friday: Income from CarMax (KMX).