Bear markets in both cases have maximized losses in portfolios this year as Federal Reserve rate hikes have sapped risk appetite, and some investors have greeted the recent rallies in stocks and bonds with skepticism. .
The S&P 500 is now up about 15% from its mid-June low, but is still down 12% year-to-date. Ten-year Treasury yields, which move inversely to prices, have fallen about 70 basis points since their peak in June.
The consumer price index remained unchanged last month after rising 1.3% in June, the Labor Department said on Wednesday.
Although hurdles remain for further gains in the market, investors said the weaker-than-expected CPI figure will likely moderate expectations about how aggressively the Federal Reserve will have to raise interest rates this year. to keep inflation under control, increasing the appeal of both asset classes.
“The number is a huge relief because anything that stops the Fed from doing more damage is positive for all of us,” said Bryce Doty, senior portfolio manager at Sit Investment Associates.
Mr Doty said he was increasing exposure to longer-term bonds in his portfolio, betting that yields are unlikely to return to the highs they have seen this year.
A renewed optimism was apparent in Wednesday’s reaction to the figure, which showed the biggest deceleration in month-on-month price growth since 1973.
The S&P 500 climbed 2.1% while yields on the benchmark 10-year Treasury fell to 2.7827%. Fed funds futures now only point to about a 38% chance of a 75 basis point rate hike at the Fed’s September meeting, down from 63% before the US data. inflation on Wednesday, according to Refinitiv data. [FEDWATCH]
The Cboe Volatility Index, known as the Wall Exchange’s fear gauge because it reflects investor demand for downside protection in stocks, fell to its lowest level in nearly four months.
“A month doesn’t necessarily make a trend, but we’re certainly encouraged that inflation is moving in the right direction,” said Jack Ablin, chief investment officer at Chicago-based Cresset Capital.
The Target 60/40 Allocation Fund, which follows a standard portfolio technique of keeping 60% of its assets in equities and 40% in fixed income, rebounded around 7% on Tuesday from its post low. its worst first-half performance since its launch in 2006.
Continued declines in bond yields and expectations of a less hawkish Fed should support a rally in many growth and tech stocks that were hit hard earlier this year. Higher interest rates generally hurt technology and growth stocks, as their valuations rely more on future cash flows.
The tech-heavy Nasdaq rose 20% from its mid-June low, while many so-called “same” stocks, which have been favored by retail investors since last year, experienced an impressive rebound.
Retail investors bought $6.9 billion net worth of stocks in the past week, compared to $4.2 billion in net purchases in the week to June 24, the most low level recorded in 2022, according to data from Vanda Research.
ALWAYS HISITING
Many investors are still hesitant to jump on rallies in stocks or bonds. Three previous rebounds in the S&P 500 have withered this year, with the index crashing to new lows. The big swings in the Treasury markets, meanwhile, have misled investors.
“Our view is that we’re going to need … clear and convincing evidence that inflation is on a slowing trajectory, before the Fed likely loses religion when it comes to fighting inflation,” he said. said Jonathan Duensing, Head of Fixed Income at Amundi US.
The firm expects 10-year yields to remain in a range between 2.75% and 3.5% in the coming months. They were recently at 2.77%.
Some Fed officials have already offered a counterpoint to expectations of a dovish central bank pivot.
Minneapolis Federal Reserve Chairman Neel Kashkari said on Wednesday he stands by his view that the U.S. central bank will need to raise its key rate an additional 1.5 percentage points this year and further in the future. 2023, even if it causes a recession.
Investors will see another inflation report and another payroll number before the Fed meets in September. Producer price index data, due Thursday, may offer further clues to inflation.
Still, others think there could be more upside, at least in the short term. Michael Purves, managing director of Tallbacken Capital, said the S&P 500 could climb as high as 4,400 – about 5% above current levels – supported by stable earnings and recent positive economic data.
“This recommendation does not mean we think we are out of the woods,” he wrote on Wednesday. However, “for the near future, we believe the risk/reward ratio is strongly in favor of the equity bulls.”