NEW YORK (Reuters) – The calm in the US stock market may be beginning to unravel, as a host of concerns fuel investors looking to cash in on the S&P 500 (. SPX) rising more than 7% this year.
For weeks, US stocks rose while measures of market volatility slipped, despite concerns including uncertainty about the health of regional banks, the approaching deadline to raise the US debt ceiling and concerns about the impact of the Federal Reserve’s aggressive monetary policy.
Although stocks remain near their 2023 highs, some investors now believe that these factors will soon start to take a bigger toll, limiting further upside. Front and center are concerns about regional banks, whose shares fell again on Tuesday despite a weekend auction that found a buyer in troubled First Republic Bank (FRCN).
Chuck Carlson, CEO of Horizon Investment Services, said the market may be “returning to the corner of the banking crisis.” “I think that is what pushed the market out of the low volatility environment.”
The S&P 500 fell 1.2% on Tuesday while the Cboe Volatility Index (.VIX), known as a measure of fear on Wall Street, jumped after hitting its lowest closing level since November 2021 on Friday.
Meanwhile, concerns about a possible US default mounted after the Treasury Department warned on Monday that the government may run short of cash to pay its bills by June.
And while investors expect the Fed to signal a pause in its monetary tightening after raising interest rates again on Wednesday, many worry that the cumulative effect of the rate increases will create more turmoil throughout the economy.
With regional bank weakness and concerns about a US default under pressure in the near term, “things could fluctuate a little bit in the near term,” said Seth Heckel, derivatives portfolio manager at Innovative Portfolios.
Heikal believes that investors with shorter time horizons should dilute the stock and increase cash allocation. Carlson, of Horizon Investment Services, said his firm’s portfolios have lower-than-usual levels of exposure to equities, and instead own money market funds and short-term bonds.
“It is difficult for us to come up with a scenario in which market upside is much greater than 3% to 5% from current levels,” Keith Lerner, chief investment officer at Truist Advisory Services, wrote in a note on Tuesday.
Not easy calm
The volatility has disturbed a quiet period in stocks, which over the past week has helped post better-than-expected earnings for many technology and growth stocks.
April included two weeks without a single daily move of at least 1% in either direction for the S&P 500, according to Willie Delwiche, investment strategist at Hi Mount Research. Over the previous 16 months, there had only been one such week for the benchmark stock index, Delwich said.
Many investors do not expect this calm to last, as a battle over raising the $34 trillion US debt ceiling looms.
Treasury Secretary Janet Yellen warned Monday that the agency is unlikely to meet all of its payment obligations to the US government “probably on June 1” without action by Congress.
Matthew Timm, head of traded equity derivatives at Cantor Fitzgerald, said some investors took out options positions designed to protect their portfolios in June and July, a period many believe stocks may be vulnerable to volatility associated with the debt ceiling.
“People are terribly vulnerable,” said Tim, who recommended hedging portfolio options in major exchange-traded funds.
eyes on nutrition
Much depends on the message Fed Chair Jerome Powell delivers at the end of the monetary policy meeting on Wednesday.
The state of futures markets showed investors seeking an 87% chance that the Fed will raise interest rates by 25 basis points on Wednesday, according to CME FedWatch, followed by cuts later in the year – although policymakers expected borrowing costs to remain. At current levels roughly through the end of the year.
If the investors are right, the markets could be on their way to more gains. Goldman Sachs strategists write that in the six rate hike cycles since 1984, the S&P 500 has posted a three-month average return of 8% after peak money rate.
However, the S&P 500 is already trading well above its value at the end of any cycle except for the cycle ending in 2000, when the S&P 500 fell despite the Fed’s pause, the bank said. Goldman’s year-end target is 4,000 for the index, about 3% below Tuesday’s close.
(Reporting by Louis Kroskoff, Saqib Iqbal Ahmed and Laura Matthews, with additional reporting by Gertrude Chavez-Dreyfus); Editing by Ira Yosibashvili and Grant McCall
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