Stocks have experienced a remarkable rebound in the past few weeks, bringing hope to investors who have been nursing losses for the year. This resurgence is attributed to the belief that inflation may have reached its peak and that the Federal Reserve will soon reduce its interest rate increases. As a result, Wall Street is now filled with optimism.
The Dow has surged by 17% since the end of September, marking its best month since 1976. The Nasdaq and S&P 500 have also seen gains of approximately 6% and 11% respectively.
The CNN Business Fear & Greed Index, which analyzes market sentiment, is currently showing signs of Greed and is not far from Extreme Greed levels. This is a significant shift from just a month ago when the index was in Extreme Fear territory.
Investors seem to be banking on smaller rate hikes as the reason behind this change in market sentiment. Nicholas Brooks, head of economic and investment research at ICG, explains that the view is that inflation and rates have reached their peak. While the Fed may still need to increase short-term interest rates, longer-term bond yields have started to fall and may continue to do so.
In addition to this, mostly solid third-quarter earnings reports have contributed to boosting traders' moods, with the exception of tech stocks.
Analysts are expecting decent earnings growth of about 6% in 2023, according to estimates from FactSet Research.
Despite the FTX bankruptcy and crypto meltdown, the broader stock market doesn't seem to be significantly affected. Shares of Coinbase and bitcoin miners have experienced a decline, but there is no contagion spreading to the rest of the financial sector or the overall economy.
However, there are concerns that the rapid surge in stocks may be overdone. Profit projections are viewed as overly optimistic, especially if the Fed's rate hikes eventually lead to an economic downturn. Some investors may be overreacting to the latest inflation data, even though the numbers are historically high.
There is a sense of urgency among investors to get back into stocks, fearing that they may miss out on a potential year-end rally. Mark Haefele, chief investment officer at UBS Global Wealth Management, believes that there may be more downside for markets in the next three to six months.
Despite these concerns, there are still opportunities in the market, particularly with smaller and mid-sized companies. George Young, a portfolio manager with Villere & Co., is bullish on smaller companies as they are not as widely held as mega-cap blue-chip market leaders. Additionally, the US economy appears to be in better shape than others around the world, which benefits companies with a domestic focus.
Investors should be prepared for occasional bouts of market volatility but may find bargains within the small and mid-cap world.