The quietest week in equities so far in 2021 leaves Wall Street wondering what will break the calm.
Stock trading fell as the S&P 500 rose to an all-time high, with the five-day average in US stock markets trading at 9.5 billion – the lowest since October, according to Bloomberg data. Friday was particularly quiet, with just 8.7 billion shares moving, the lowest daily total since Christmas Eve.
The silence feeling especially suddenly after 13 months of insane trading brought the fastest bear market to date and a furious rally unmatched in 90 years. Home traders turned online brokers into casinos, while vaccine approval caused more euphoria in November, prompting investors to move stocks they would avoid for months. Since then, more than $ 575 billion has flowed into the market, collectively exceeding the total inflows of the past twelve years, according to data from Bank of America.
That all changed in April, and the theories abound about what lies behind it. The retail mania has cooled as economic constraints eased. Stimulus bets have been settled. A short sale resulted in higher returns by a chorus of the Federal Reserve. Economic data is beginning to appreciate valuations. There are just less important issues left to promote big market bets. No matter, money managers say, tranquility will not last.
“We’ve covered 100 kilometers per hour and now we’re within the speed limit,” Arthur Hogan, chief market strategist at National Securities, said by telephone. ‘We will see an increase in volumes and volatility, because this year is going to be like no other year that people have ever seen in terms of economic growth, earnings growth, inflation, a brand new framework for the Federal Reserve. ”
After a 1.4% rally on Monday, the S&P 500 broke three more records to end the week as trading volumes declined to pre-pandemic averages. The index made a third consecutive profit, and the Cboe volatility index fell to its lowest level in 14 months. Fading bets on Fed hikes spurred the biggest weekly drop in five-year treasury yields since June.
Traders whipped by the pandemic are not moved by the calm and are pointing to signs that more turmoil is coming. Take the VIX. At 17, it has stubbornly increased compared to the average of 14.9 in the seven years to 2019. Bets that summer will bring more chaos to the market, the spread between the VIX and the 30-day volatility has four months from now until the widest level in nearly nine years.
Bond markets show similar expectations for fireworks – short interest in the $ 14 billion The IShares 20+ year exchange traded fund as a percentage of the outstanding shares rose to the highest level since 2017 this week, data from IHS Markit Ltd. shows, even though the ETF has risen.
Meanwhile, Wall Street forecasters believe that the progress that pushed the S&P 500 to the dot-com era valuations is likely to be exhausted for the year. At a high of 4 128.80, the index closed Friday before the year-end average targets of 4,099 of strategists followed by Bloomberg.
Skeptics cite everything from rising yields to protracted valuation and possible tax increases as a reason for caution. Tobias Levkovich, chief US equities strategist at Citigroup Inc., with his 2021 target at 3,800, expects the Fed to start putting back a monetary stimulus later this year and weakening the lead in earnings, causing headwinds for equities and volatility.
‘Sentiment is in a very worrying area, just like valuation, but cash flow is still flowing indexes higher, ”Levkovich wrote in a note earlier this week. “Great fiscal stimulus and supportive central banks have created the idea that there is no need for risk aversion,” he added. ‘All developments are indeed seen as positive news. Yet such one-sided views are usually not a good starting point. ‘
Kim Forrest of Bokeh Capital Partners feels more optimistic. She expects the kick-off of the best earnings season since 2018 to breathe life into the stock, with major lenders including JPMorgan Chase & Co. and Citigroup Inc., which will report next week. Profits of the S&P 500 businesses in the first quarter were likely to rise by 24%, led by carmakers, banks and retailers, according to data compiled by Bloomberg Intelligence.
“Unless there’s another craze like Covid’s going on, earnings are always driving the market,” said Forrest, the firm’s chief investment officer. “We’re on our way to the earnings season and the benchmark is set very low, and I think the first quarter was pretty good, so that’s encouraging.”
– Assisted by Vildana Hajric and Claire Ballentine