Stocks Rebound After Inflation and Tariff Concerns
Stocks surged at the start of the week, reversing a slide triggered by inflation apprehensions and US tariff threats. The dollar strengthened, while gold reached a new high.
Technology Sector Leads Advance
The rally was led by the Nasdaq 100, which gained over 1% on Monday. Technology companies, including Nvidia Corp. and Meta Platforms Inc., posted significant gains.
Materials Producers Benefit from Tariffs
Materials producers were in the spotlight following President Donald Trump's announcement of 25% tariffs on steel and aluminum imports. United States Steel Corp. and Alcoa Corp. rose by at least 2.5%.
Inflation Data and Fed Testimony Key This Week
Investors will closely monitor this week's inflation data and Federal Reserve Chair Jerome Powell's testimony before Congress. Inflation expectations have remained unchanged at 3% for the next year and three years, according to the New York Fed's survey of consumer expectations.
Hedge Funds Fuel Market Surge
Hedge funds emerged as major buyers of US stocks last week, following stronger-than-expected earnings reports. They bought stocks at the fastest pace since November, leading to the heaviest net buying of individual stocks in over three years.
S&P 500 Looks for Breakout
The S&P 500 rose by 0.7%. Chris Larkin of E*Trade from Morgan Stanley believes the index needs a break from negative surprises to break out of its two-month consolidation.
Dollar Strengthens
The Bloomberg Dollar Spot Index rose by 0.2%. The yield on 10-year Treasuries remained relatively stable at 4.5%.
Gold Tops $2,900
Gold surged past $2,900 an ounce. Investors are realizing that the tariff rhetoric is likely more of a negotiation tactic than a serious threat to global commerce.
Market Volatility Remains Low
Despite the news flow, the market has been surprisingly calm over the last 100 trading days. The S&P 500 exchange-traded fund (SPY) has traded within a narrow range of less than 10%.
Experts Advise Caution
Analysts suggest that investors remain cautious and avoid overreacting to news cycles. Mark Hackett of Nationwide notes that high valuations, elevated rates, and policy uncertainty remain key investor concerns.
Outlook for 2023
While investor expectations for the stock market are high, strategists anticipate measured gains this year rather than the blockbuster returns of recent years. The cyclically-adjusted price-to-earnings ratio (CAPE) stands at nearly 38, indicating extremely high valuations.
Rotation into Value and Cyclicals
Lisa Shalett of Morgan Stanley Wealth Management expects a shift in stock index leadership from the Magnificent Seven towards value, cyclicals, and non-GenAI infrastructure secular growth.
BlackRock Sees AI as Major Force
BlackRock Investment Institute strategists remain overweight US equities due to their positive macroeconomic outlook and the transformative power of AI.
Diversification Essential
Christian Floro of Principal Asset Management emphasizes the importance of diversification to manage portfolio risk in a volatile environment.
Key Events This Week
* Fed Chair Powell testifies before Senate Banking Committee (Tuesday)
* US CPI data released (Wednesday)
* Fed Chair Powell testifies before House Financial Services panel (Wednesday)
* Eurozone industrial production and US jobless claims data released (Thursday)
* US retail sales, industrial production, and business inventories data released (Friday)