For all of the bank failures, falling bond rates, pounding in oil and mining equities, and day-in, day-out volatility, Adam Sarhan declares this week a triumph.
"The stock market had every opportunity to crash, but it didn't," said Sarhan, founder of 50 Park Investments and author of Psychological Analysis: How to Earn Money, Outsmart the Market, and Join the Smart Money Circle. "That's bullish."
The Federal Reserve's stance toward interest rates is the underlying cause of all the turmoil - and might be what calms it down.
The S&P 500 Index gained 1.4%, while the tech-heavy Nasdaq 100 Index gained 5.8% for its best week since November, despite a critical Fed meeting and a ninth straight rate rise forecast. Yet, after a year of lamenting the central bank's tightening of monetary policy, investors now see additional rate rises as a show of confidence in the economy and financial system.
Even if a rising crisis of trust in the US financial sector shook investors, the Cboe Volatility Index's movements did not necessarily reflect that. The VIX, Wall Street's top fear index, finished at 25.5 on Friday, a level lower than its average for the year. An examination of the so-called skew of the VIX also indicates that concern is beginning to fade.
Since March 10, when the financial system's crisis became clear, the cost of protecting against VIX increases over the next month has been declining. The implied volatility in futures betting on a reduction in the fear gauge in the coming month has increased.
Sarhan of 50 Park is long US equities in the short term, especially battered tech and growth companies like chip stocks and certain brokerage businesses like Charles Schwab Corp. Investors have been picking up classic tech booms businesses like Microsoft Corp., Google Inc., and Apple Inc., which are recognized for their stability and high cash flows. Last week, the Russell 1000 Growth Index rose 4.1% while the Russell 1000 Value Index fell 1.7%, the largest disparity between the two since 2001.
Notwithstanding the instability in the banking industry, investors do not expect the Fed to suddenly become dovish. Dealers anticipate a quarter-point increase to a range of 4.75% to 5% next week. They also predict that the policy rate will peak in May.
The catch for growth stocks is that inflation remains a barrier, which means the Fed will likely be compelled to continue raising rates after Wednesday's meeting, according to Brian Frank, portfolio manager of the Frank Value Fund. He recommends purchasing beaten-down energy companies, which are traditionally considered as a buffer against inflation after the sector lost 7% last week as US oil prices fell.
The Fed's advice over the next months will be a significant focus for markets. They'll be looking for any changes in the most recent quarterly rate estimates, known as the dot plot after some officials said it could be prudent to pause the pace of rises if wage growth cools, which appears to be happening.
According to economists at Barclays Plc led by Marc Giannoni, the median of the dot plot would indicate a 5.1% high in 2023. This is consistent with the projections made by authorities during their December meeting.
"The market rebounded this week, acting as if SVB and Credit Suisse were a one-off, and the financial system can withstand that," Frank added. "I've lost some sleep over this. I'm still not persuaded that everything is in order. I have not purchased a bank stock since 2008."
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