ORLANDO, Fla., Nov 25 (Reuters) – As Wall Street reopens after the Thanksgiving holiday, investors are looking for a final boost to ensure 2022 ends up being simply bleak rather than the bloodbath most feared .
Since hitting a two-year low in October, the S&P 500 has rebounded 15% even as interest rates, expectations of Fed tightening and the likelihood of a recession have all risen, and the outlook for earnings growth deteriorated.
Investors seem determined to end the year recouping as much of their prior losses as possible, and the good news is that post-Thanksgiving trading history is on their side.
According to Ryan Detrick, chief market strategist for the Carson Group, in the 23 years since 1950, when the S&P 500 has fallen year-to-date on Thanksgiving, it has risen 14 times in the remaining weeks of the month. year.
The average year-to-date loss on Thanksgiving days in those years was 10.5%, and the average rise after Thanksgiving through Dec. 31 was 1.5%.
The S&P 500’s year-to-date loss on Thanksgiving Thursday this year was 15.5%, after falling 27% in mid-October. Can he sustain this recovery momentum?
“We are entering one of the seasonally bullish periods of the year and given the likelihood of a continued spike in inflation and a dovish turn for the Fed soon…we are on the lookout for a another strong year-end rally,” Detrick said.
If there was ever a year when Wall Street was poised for an above-average whoosh in the final trading weeks of the year, this is it.
Even beyond the instinctive “FOMO” (fear of missing out) of investors on the ongoing recovery, positioning is extremely light and portfolios are historically underweight equities. This reinforces the bullish bias that is currently driving the market, regardless of fundamentals such as growth prospects or interest rates.
Purely from a risk management perspective, investors will be reluctant to start a new year heavily overweight or underweight, so they will be inclined to reverse this trend at the end of the current year.
WEAR THIS UNDERWEIGHT
According to Bank of America’s latest Global Fund Manager Survey, investors’ cash levels in November stood at 6.2%. That’s down slightly from the previous month’s 21-year high of 6.3%, but still well above the long-term average of 4.9%.
Relative to the average positioning of the past 10 years, investors’ main underweight this month is in equities. Their current equity allocation is 2.4 standard deviations below the long-term average.
Their outright underweight position in tech stocks, meanwhile, is the largest since 2006.
“Manna from heaven for Q4 bulls,” BofA analysts wrote in the monthly note.
The bond market may be crying recession – nearly the entire US Treasury yield curve is inverted, with parts showing the deepest inversion in over 40 years – but signals from Wall Street can be summed up as follows: keep calm and keep buying until the end of the year.
Look at Wall Street’s volatility gauges. The VIX implied volatility index hit a three-month low of 20.32 on Wednesday and has now fallen for six straight days, the longest string of declines since May.
Having reduced their losses considerably from the start of the year, stocks are not taking into account the damage that higher interest rates could cause. They will at some point, but not yet.
Essentially, “risk-free” assets are prepared for the worst, risky assets are not. Bond investors’ glass is always half empty, while equity investors are inherently optimistic and typically ignore warning signs until it’s too late.
To echo former Citigroup CEO Chuck Prince’s infamous line from 2007, as long as the music plays, equity investors will keep dancing. Festive tunes play.
(Views expressed here are those of the author, columnist for Reuters.)
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– The Fed could be attentive to the favorable alarm on the yield curve
By Jamie McGeever Editing by Marguerita Choy
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