Despite S&P 500 and Nasdaq record highs – is there a worry the market is due a correction?
Looking at the recent records for the S&P 500 and Nasdaq you’d think all is good. Inflation fears have eased, economic indicators are strengthening and the Federal Reserve remains extremely supportive.
But if you look past the market cream topping you’ll likely find a growing sense of concern. The market is very frothy, in my opinion.
Risk off?
Investors are taking risk off the table as a new coronavirus variant causes fresh outbreaks in many parts of the world. Airline and cruise stocks are being dumped (or not bought at least). Businesses have more concerns about rising wages, demonstrating a strength in pricing. Sectors, inparticular technology, are back on top again.
Rally
There are even indications that the S&P 500’s almost 90% rally from the pandemic bottom of March 2020 could be due for a pause, since fewer stocks are participating in the latest climb up. This has helped slow equity inflows as bond demand increases. Primarily tech stocks have aided the S&P 500 climb.
Bad news is good news
The bad news – is good news mantra cannot keep encouraging market gains regardless of true situation. Not all news is good but much bad news has a spin put on it – and the markets forever creep up. So even bad news is perceived as good – you know what I mean.
S&P 500 and Nasdaq advance
The S&P 500 advanced for a fifth week in a row, closing above 4300 for the first time ever. The tech heavy Nasdaq outperformed, achieving seven straight weekly gains, the longest win since late 2019.
Many investors appear to be adjusting their positions in anticipation of stronger headwinds.
ETF’s focusing on U.S. stocks lost almost $6 billion in the week through Thursday , a departure from the first few months of the year, when they lured more than $200 billion of virgin money. Demand for safe havens spurred the second highest monthly inflows.
Speculation
Professional speculators have also started to rein in risk. In the final days of June, hedge funds reduced their long positions while covering their shorts. Their risk off activity reached the highest level since late January, net leverage still sits high.
Despite these concerns it is likely the majority will remain invested. Growth may be peaking, but U.S. earnings are still expected to climb again through all of 2022. Fed policy now hints at a slight hawkish mood, yet we appear to be a long way from raising interest rates still, despite inflationary pressure. The U.S. market outlook remains a little mixed to me at this stage.
Carry on from where we left off – before the pandemic hit?
Did the pandemic pause the market cycle that was in action in February 2020, or did it end and a new one start? In 2020 market pundits were suggesting the market was starined and had reached a top. We have now gone beyond those valuations with the S&P 500 and Nasdaq at new all time highs and the Dow chasing down 35000 again.
Is there more room for gains in this market or is it the strain now showing?The Fed has done its job but does the market reflect the true valuation?
The next few months will tell.