ORLANDO, Fla., Nov. 25 (Reuters) – As Wall Street reopens after the Thanksgiving holiday, investors are looking for one last push to ensure 2022 ends up being merely bleak rather than the bloodbath most had feared.
Since hitting a two-year low in October, the S&P 500 has rebounded 15% even as interest rates, Fed tightening expectations and recession odds have risen, and earnings growth prospects have worsened.
Investors appear determined to end the year recovering as much of their previous losses as possible, and the good news is that the post-Thanksgiving trading story is on their side.
According to Ryan Detrick, chief market strategist at the Carson Group, in the 23 years since 1950, when the S&P 500 fell year-to-date on Thanksgiving, it has risen in the remaining weeks of the year 14 times.
Average year-to-date losses on Thanksgiving these years were 10.5%, and the average gain after Thanksgiving through December 12. 31 was 1.5%.
The S&P 500’s year-to-date loss on Thanksgiving Thursday this year was 15.5%, after falling as low as 27% in mid-October. Can you keep up this recovery momentum?
“We are entering one of the seasonally bullish periods of the year and given the likelihood of a continued spike in inflation and a dovish turn for the Fed soon…we are looking for another strong year-end rally,” he said Detrick.
If ever there was a year that Wall Street was poised to post an above-average whoosh in the final trading weeks of the year, this is it.
Even beyond investors’ instinctive “FOMO” (fear of missing out) on the ongoing recovery, positioning is extremely light and portfolios have historically been underweighted. This reinforces the bullish bias that currently drives the market, regardless of fundamentals such as growth prospects or interest rates.
From a purely risk management perspective, investors will be reluctant to start a new year heavily overweight or underweight, so will be inclined to reverse that bias as the current year winds down.
BRING THAT UNDERWEIGHT
Investor cash levels stood at 6.2% in November, according to Bank of America’s latest survey of global fund managers. It was down from the previous month’s 21-year high of 6.3%, but still well above its long-term average of 4.9%.
Compared to the average placement over the last 10 years, the biggest investor underweight this month is in equities. Their current equity allocation is 2.4 standard deviations below its long-term average.
Their absolute underweight position in technology stocks, meanwhile, is the largest since 2006.
“All the godsend for the fourth quarter bulls,” BofA analysts wrote in the monthly note.
The bond market may be screaming recession – nearly the entire US Treasury yield curve is inverted, some parts show the deepest inversion in more than 40 years – but Wall Street’s signals can be summed up as: keep calm and carry on to buy until the end of the year .
Look at Wall Street Volatility Indicators. The VIX Implied Volatility Index hit a three-month low of 20.32 on Wednesday and is now down for six straight days, the longest streak since May.
Having significantly trimmed their losses since the start of the year, equities aren’t pricing in the damage higher interest rates will cause. They will at some point, but not yet.
In essence, “risk-free” businesses are prepared for the worst, risky businesses are not. Bond investors’ glass is always half empty, while equity investors are inherently optimistic, so they usually don’t heed warning signs until it’s too late.
To echo former Citigroup CEO Chuck Prince’s infamous quip from 2007, as long as the music plays, stock investors will keep dancing. Party tunes are playing.
(Opinions expressed here are those of the author, a Reuters columnist.)
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By Jamie McGeever Edited by Marguerita Choy
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