Wall Street: Investor Skepticism Gives Way to Optimism as US Stock Rally Persists
In a dramatic shift of sentiment, investors who once feared overexposure to equities are now concerned about missing out on market gains. The S&P 500’s year-to-date rally of 15 percent has enticed previously hesitant investors back into the market. Many individuals who had reduced their stock holdings during the challenging downturn of 2022 are now adjusting their strategies.
Last week, the National Association of Active Investment Managers’ exposure index reached its highest level since late 2021. Furthermore, cash levels among global fund managers, surveyed by Bank of America this month, fell to their lowest point since January 2022.
Deutsche Bank data indicates that positioning among discretionary investors, including fund managers and individual investors, moved above neutral earlier this month for the first time since February.
Meanwhile, options investors are showing increased interest in buying calls, which are bets on upward movements in stocks. Trade Alert data reveals that a record 1.8 million S&P 500 calls were traded on Thursday, resulting in the highest one-month moving average of calls-to-puts in at least four years.
“If you’ve been fighting this market, you’re very likely exhausted,” stated Emily Roland, co-chief investment strategist at John Hancock Asset Management, who has been gradually increasing equity allocations.
The current market gains are fueled by various factors, such as the resilient US economy that has thus far avoided a recession despite the Federal Reserve’s aggressive monetary policy tightening. Additionally, the growing excitement surrounding advancements in artificial intelligence contributes to the positive sentiment.
Several Wall Street banks, including Goldman Sachs, are revising their forecasts to reflect higher expectations for stock performance. Goldman Sachs strategists recently raised their year-end S&P 500 target to 4,500 from 4,000, citing their belief that the economy is likely to steer clear of a downturn in the next 12 months. As of Friday, the index stood at 4,409.59, marking a 23 percent increase from its October lows.
Willie Delwiche, an investment strategist at Hi Mount Research, anticipates that improving sentiment will support stocks as long as it does not reach excessive levels. Delwiche emphasized that the transition from pessimism to optimism breathes new life into bull markets. However, he cautioned against extreme levels of sentiment.
Historical analysis demonstrates that stocks tend to continue rallying after surpassing a 20 percent increase from their lows. According to LPL Financial data, the S&P 500 has experienced a median gain of 18 percent in the 12 months following the 20 percent threshold.
Despite the optimistic outlook, some concerns about overvaluation exist. Brent Kochuba, founder of options analytic service SpotGamma, suggests that while high levels of call option buying can support markets, caution should be exercised in the near term.
Matt Stucky, senior portfolio manager of equities at Northwestern Mutual Wealth Management Company, believes that sentiment has surged too rapidly, as evidenced by the AAII survey. Stucky anticipates that the Federal Reserve’s rate hikes may lead to a mild recession later this year or in early 2024. The Fed recently opted to keep rates unchanged but suggested that additional increases may be necessary in 2023.
“We’re starting to take a little bit off the table,” Stucky stated, highlighting their decision to reduce exposure.
On the other hand, some market participants believe that the rally still has room to continue. One positive indicator is that more S&P 500 stocks are experiencing upward momentum, not just the select few megacap growth names like Microsoft and Nvidia that have been leading the gains this year.
For instance, small caps and industrial shares, which have historically lagged behind, have outperformed thus far this month. Furthermore, the number of S&P 500 stocks trading above their 200-day moving average reached a two-month high this week.
Ken Mahoney, CEO of Mahoney Asset Management, has been increasing positions in Microsoft and Nvidia recently. He expects that the market will continue to rise due to substantial call buying, fear of missing out, and bearish investors reversing their bets.
“The market is overheated, and everyone and their grandmother can see it, but it may take some time before we see a blow-off top,” Mahoney commented, acknowledging the current market conditions.
