- Investors seem determined to close the year clawing back as much of their earlier losses as possible.
- The good news is post-Thanksgiving, trading history is on investors' side.
- Since hitting a two-year low in October, the S&P 500 has rebounded 15% even though interest rates, Fed tightening expectations and recession probabilities have all risen, and even as earnings growth outlook has deteriorated.
Orlando, Florida: As Wall Street reopens after the Thanksgiving holiday, investors are looking for one final push to ensure 2022 ends up being merely grim rather than the bloodbath most had feared.
Since hitting a two-year low in October, the S&P 500 has rebounded 15 per cent even though interest rates, Fed tightening expectations and recession probabilities have all risen, and the earnings growth outlook has deteriorated.
Investors seem determined to close the year clawing back as much of their earlier losses as possible, and the good news is post-Thanksgiving trading history is on their side.
According to Ryan Detrick, chief markets strategist at the Carson Group, of the 23 years since 1950 when the S&P 500 has been down year-to-date on Thanksgiving, it has risen in the remaining weeks of the year 14 times.
The average year-to-date losses on Thanksgiving days in these years was 10.5 per cent, and the average rise post-Thanksgiving through December 31 was 1.5 per cent.
The S&P 500's year-to-date loss on Thanksgiving Thursday this year was 15.5 per cent, having been down as much as 27 per cent in mid-October. Can it keep this recovery momentum up? "We are entering one of the seasonally bullish periods of the year and given the likelihood for a continued peak in inflation and dovish turn for the Fed soon ... we are on the lookout for another strong end of year rally," Detrick said.
If ever there was a year Wall Street was primed to register an above-average whoosh in the last few trading weeks of the year, this is it.
Even beyond investors' instinctive "FOMO" (fear of missing out) on the upswing underway, positioning is extremely light and portfolios are historically underweight stocks. This strengthens the upward bias currently driving the market, regardless of fundamentals such as the outlook for growth or interest rates.
From a purely risk management perspective, investors will be reluctant to start a new year heavily over- or underweight, so they will be inclined to reverse that skew as the current year winds down.
Carry that underweight
According to Bank of America's latest global fund manager survey, investors' cash levels in November stood at 6.2 per cent. That's down a smidgen from the previous month's 21-year high of 6.3 per cent, but still well above the long-term average of 4.9 per cent.
Relative to average positioning over the past 10 years, investors' biggest underweight position this month is in stocks.
Their current equity allocation is 2.4 standard deviations below the long-term average. Their outright underweight position in tech stocks, meanwhile, is the largest since 2006.
"All manna from heaven for Q4 trading bulls," BofA's analysts wrote in the monthly note.
The bond market may be screaming recession - almost the entire U.S. Treasury yield curve is inverted, some parts showing the deepest inversion in over 40 years - but Wall Street's signals can be summed up as: keep calm, and carry on buying into year-end.
Look at Wall Street's volatility gauges. The VIX index of implied volatility hit a three-month low of 20.32 on Wednesday and has now fallen six days in a row, the longest run of declines since May.
Having significantly reduced their losses from earlier in the year, equities are not pricing in the damage higher interest rates will do. They will at some point, but not yet.
In essence, "risk free" assets are braced for the worst, risk assets aren't. Bond investors' glass is always half empty, while stock investors are inherently upbeat so usually fail to heed the warning signs until it's too late.
To echo former Citigroup CEO Chuck Prince's infamous line from 2007, as long as the music is playing, equity investors will keep dancing. The party tunes are playing.