Stocks, which had come under heavy pressure on fears that interest rates could rise in the longer term, were given a new boost during the market’s stormy rally in November.
The S&P Regional Bank Index (KRE) rose more than 16% for the month, including a rise of more than 2% on Wednesday. Cathie Wood’s flagship Ark Innovation ETF (ARKK) gained more than 34%. Meme stocks are also booming, with the broad-based Roundhill Meme ETF (MEME) gaining more than 20% in November and meme stock favorite GameStop gaining over 20% on Wednesday alone.
The small-cap Russell 2000 Index (^RUT), which had been largely shunned on fears that high interest rates would bankrupt small companies, rose more than 9% this month.
“Traders have decided that cash, while still yielding nearly 5%, is trash compared to quick gains across a variety of risky assets,” Steve Sosnick, chief strategist at Interactive Brokers, wrote in a research note on Wednesday.
Sosnick adds that the root of what he called the “fear of missing out” or “FOMO” rally is the “expectation that interest rates are going to go down, and that is actually a solid reason for one Rise in risky assets.”
Fears of another Fed rate hike had weighed on broader indices and particularly technology stocks between the Fed meeting in September and the meeting on November 1st.
When the S&P 500 (^GSPC) bottomed in late October, institutional investors were “caught off guard,” Callie Cox, U.S. investment analyst at eToro, told Yahoo Finance. According to a measure by the National Association of Active Investment Managers, investors were the least invested in stocks in more than a year.
As signs of cooling inflation gave investors the idea that the Fed might not only be done raising rates but could soon even cut rates, they invested in interest rate-sensitive sectors last month in an effort to “chase performance,” he said Cox. Real estate (XLRE) and technology (XLK) gained more than 12% in November, while financials (XLF) and consumer discretionary (XLY) gained more than 10%.
The story goes on
“Many [institutional investors] “We are pushing into these high duration sectors, which is driving rate cut trading, and that could continue through the end of the year,” Cox said.
With the active manager index now at its highest level since the peak of the AI-fueled rally over the summer, the key question for investors will be whether markets have priced in rate cuts too aggressively and whether investors overall are too optimistic despite myriad headwinds versus stocks are heading into 2024.
For its part, the Federal Reserve has tried to dampen expectations of interest rate cuts.
“It would be premature to conclude with confidence that we have reached a sufficiently hawkish stance, or to speculate about when monetary policy might be eased,” Fed Chairman Jerome Powell said in prepared remarks at Spelman College on Friday Atlanta.
Kristina Hooper, chief global market strategist at Invesco, told Yahoo Finance on Thursday that the Fed has an “incentive” to talk down markets lest financial conditions ease too much and prove to be an upside risk to inflation. But that doesn’t mean investors are wrong.
“The market is excited,” Hooper said when discussing whether markets had gone too far during the November rally. “But I don’t disagree about that [rate] cut. I think we’ll probably see that. It’s very likely that we’ll see… We’ll probably see some downward movement in the markets, some softening in the markets. But the reality is that inflation is falling.”
Other strategists also agree that the stocks are not out of the woods yet. Bank of America noted in a new research note on Friday that investor sentiment, tracked by its sell-side indicator, increased in November amid the rally but is continuing “more bearish than bullish.”
“Despite growing expectations of a soft landing, we are still far from a market environment dominated by high conviction and euphoria,” wrote Savita Subramanian, head of U.S. equity and quantitative strategy at Bank of America.
For Cox, the key indicators in the market are not yet flashing red. For example, Bitcoin (BTC-USD) is up about 50% in the last month, but Cox has not yet seen any aggressive moves into alternative cryptocurrencies, such as the rush into Dogecoin (DOGE- USD) and other alternative coins with limited scope in 2021 practical use cases.
“The speculation will never go away,” Cox said. “It will only happen in small steps. And I think that the speculative trading we see today is just a shell of what we saw two years ago… Investors don’t just close their eyes and buy. They really think about what can survive in a still treacherous environment. Interest rates are still high. There is still a lot of uncertainty out there.”
Top view image of puzzle with text FEAR OF MISSING OUT or FOMO. (Mohd Izzuan via Getty Images)
Josh Schafer is a reporter for Yahoo Finance.
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