Adam Sarhan puts this week in the win column because of all bank collapses, plunging bond yields, the hammering in oil and mining stocks and day-in, day-out volatility.
Sarhan, author of the book Psychological Analysis: How to Make Money, Outsmart the Market, and Join the Smart Money Circle and founder of 50 Park Investments, said the stock market had every chance to crater, but it didn't. That is bullish. The Federal Reserve's attitude towards interest rates is the root cause of all the turbulence and could be what calms it down, whether the resilience persists or not.
The S&P 500 Index rose 1.4% and the tech-heavy Nasdaq 100 Index rose 5.8% for the best week since November, even with a pivotal Fed meeting coming and a ninth straight rate increase expected. After a year of bemoaning the central bank monetary policy tightening, investors now view further rate hikes as a sign of confidence in the economy and financial system.
Mimi Duff, managing director at GenTrust, said some people think the equity market would take very poorly if the Fed didn't raise rates. There is going to be some turbulence in order to land the plane. Even if a spiraling crisis of confidence in the US banking system rattled investors, the moves in the Cboe Volatility Index didn't necessarily show that. The VIX, Wall Street's leading fear gauge, closed at 25.5 on Friday, below its average level last year. It shows that anxiety is starting to subside, as a result of the so-called skew of the VIX.
The cost of protection against gains in the VIX over the next month has been decreasing since March 10, when the crisis in the banking system became apparent. Implied volatility in contracts betting on a drop in the fear gauge over the next month has gone up.
In the near-term, Sarhan of 50 Park is long US equity, including battered tech and growth shares like chip stocks and some brokerage firms, such as Charles Schwab Corp. Investors have been snapping up classic tech growth companies like Microsoft Corp. Alphabet Inc. and Apple Inc. are known for their stability and strong cash flows. The Russell 1000 Growth Index jumped 4.1% this week, while its value counterpart sank 1.7%, the biggest gap between the two since 2001.
Markets aren't expecting the Fed to dovish all of a sudden, despite all the turmoil in the banking sector. The Traders expect a quarter-point hike next week to be between 4.75% and 5%. They anticipate that the policy rate will peak in May.
Brian Frank, portfolio manager of the Frank Value Fund said the Fed will likely have to hike well beyond Wednesday s meeting because of the catch for growth stocks, because of the fact that inflation remains an obstacle. He suggests buying beaten-down energy stocks, which are typically viewed as a hedge against inflation, after the group shed 7% last week as US oil prices slumped.
The Fed's guidance for the months ahead will be a key focus for investors. They will look for any change in the latest quarterly rates projections, known as the dot plot, after some officials suggested it may be appropriate to slow the pace of hikes if wage growth cools, which it is showing signs of doing.
The median of the dot plot will show a peak in 2023 of 5.1%, according to economists at Barclays Plc led by Marc Giannoni. That is in line with what officials projected at their December meeting.
The market rallied at some points this week, acting like SVB and Credit Suisse were a one-off and the banking system can tolerate that, but I don't agree, Frank said. I am still not convinced that everything is fine. Since 2008 I haven't bought a bank stock.