The Fed’s Inaction and the Ongoing Stock Market Rally: What Could Bring It to a Halt?

Some people are still confused after the recent Federal Reserve meeting, and now there is a concern for Thursday’s market, with technology stocks appearing to be particularly unstable.

The Fed recently decided to hold off on increasing interest rates, but they expect to do so twice in the future. However, Chairman Jerome Powell attempted to make this news less alarming. Despite this prediction, the market has not factored in the suggested two rate hikes.

Some say don’t overthink this:

Tim Duy, the primary economist for SGH Macro Advisors, advises against interpreting Powell’s statement as indicating a willingness to be less strict. He believes that the decision to increase interest rates was made in May and that misunderstandings about the Fed’s intentions have led to confusion. Therefore, Duy recommends expecting interest rate hikes in both July and either October or November.

According to a report from research firm Evercore ISI, led by Julian Emanuel, the Federal Reserve may not be as influential in the stock markets as people think. The report argues that Powell and the Fed are not in a position to take drastic measures that would harm the stock market‘s growth.

According to Emanuel and the team’s note to clients, it is unlikely that the Federal Reserve has put an end to the “momentum market”. They draw a comparison to the summer of 1999, which was also volatile and unpredictable. They defined a “momentum market” as one that is not easily influenced by external factors such as the actions of the Federal Reserve.

What factors will bring an end to the strong and unstoppable bull market? Here is the list they have compiled:

  • The decrease in fear and uncertainty reflected by the decline of the Cboe Volatility Index (VIX), which measures the level of volatility in S&P 500 options, is referred to as complacency. The current VIX level is at the lowest point in three years, resting at 13. Despite this, Mark Hulbert from MarketWatch believes that this lack of tension is actually beneficial for investors.
  • Evercore is looking for high levels of optimism in the market, measured by the American Association of Individual Investors Sentiment Survey. They would like to see the percentage of bullish investors above 60%, but the most recent reading was only 44.5%. There have been a few surveys indicating a growing number of optimistic investors that analysts have been noticing.
  • The market is experiencing a trend where small-cap stocks and banks are falling behind, following a period of dominance by technology. However, the Russell 2000 index recently emerged as a leader, surpassing its larger counterparts in June. The financial sector, as indicated by the Financial Select Sector SPDR ETF, experienced a decline in May but has since recovered in June.
  • Evercore presents a chart indicating that the amount of pessimistic positions on S&P 500 E-Mini futures ES00, -0.18% have reached an unprecedented level. If these negative traders give up and buy their positions, this could cause stock prices to rise.
  • Every week, the number of people who have filed for unemployment benefits has remained at or above 300,000 for a long period of time. Recently, the number of claims reached a high of 261,000, the highest it has been in almost two years. The last time the number exceeded 300,000 was during the middle of the pandemic in 2020. Another update on these claims is expected on Thursday.

Emanuel and his team are keeping a close eye on certain indicators that could suggest that the market is about to reach its peak, especially as the S&P 500 gets closer to the 4,450 mark. Evercore, in a note published on June 4, stated that if the market continues with its current level of momentum, it is possible that their projected price target for the S&P 500 at the end of the year could be reached as early as July 4.

Evercore suggests that investors should remain optimistic about certain stocks known as “momentum masters,” including Alphabet (GOOGL), Zscaler (ZS), and Copa Holdings (CPA). These stocks are classified under the Russell 1000 index and have achieved a strong performance both year-to-date and since March 30, placing them within the top 20 of the index. All of these stocks have received an outperform rating from analysts.

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