Search Mark
Home / Expert Opinion

Improved Data & Continuous Rally

U.S. stocks closed higher on Friday, 27th January 2023, after the personal consumption expenditures (PCE) price index climbed at a slower pace of 5% year over year.  

Improving short- and long-term inflation expectations improved with the University of Michigan’s consumer sentiment climbing to 64.9, the highest in 9 months. 

Consumers expect inflation to rise 2.9% over the next five to 10 years, down slightly from preliminary readings.  

Investors bought stocks on the expectation that the Fed would hold off after an expected 25 basis point hike next week and begin to cut rates later this year. 

Once again, it was the tech that led the way, surging 1% at the end of the day. 

Here are the closing levels on Friday, 27th January 2023:

 Last Change %Change 
Dow Jones 33,978.08. +28.67. +0.08% 
S&P 500 4,070.56.   +10.13. +0.25% 
Nasdaq Comp 11,621.71. +109.30. +0.95% 
US 10Y 3.50%   
VIX 18.51 -0.22  -1.17% 

So, now that we have had a decent rally so far for the year. S&P is up over 5%, and Nasdaq is up over 10%. This could be part of the big rally I have been talking about in the past 2 commentaries.  

The confidence of investors in how the Fed is going to react after recent data is amazing.  

There is no room for error. The market expects the Fed to do what it wants, that is, pause and then cut later this year. 

The only way for this to work is that the Fed does exactly what the market wants otherwise we could be in for a shock. 

On the other hand, even if the Fed continues its hawkish tone, the markets may not believe it and may continue to rally.  

Technicals suggest there could be more upside and with the VIX at these low levels, buying downside protection is getting less expensive, and conducive for risk-taking.  

When markets are looking too optimistic, I like to be aware of downside risks. 

Here are a couple of articles that highlight the risk. 

Jeremy Grantham from GMO, who predicted the dot-com crash, and the 2008 financial crisis said the S&P could tumble 17% this year

This Recession Indicator Hasn’t Been Wrong in 56 Years: This Motley Fool article talks about the Treasury yield spread that the Federal Reserve Bank of New York used to predict the probability of a recession.  

In December 2022, this recession probability tool hit 47.31%. That’s the highest reading since 1981 and a very clear indication that economic activity is expected to slow at some point in 2023. 

Hedge Fund That Got China Right Sees Risk in US Markets. The S&P 500 and high-yield corporate debt don’t account for “the tightening cycle and the chance of recession going up,” making them vulnerable to another selloff, according to Nicholas Ferres, chief investment officer for Vantage Point Asset Management in Singapore. 

Even with these warnings, and there have been many of them, investors are still willing to go long and may probably continue to do so (FOMO). It may however be prudent to buy downside protection just in case this bubble burst. 

Source: CBOE, Bloomberg, Motley Fool

This commentary is written by James Gomes
James has been in the finance industry for over 30 years and most recently worked for a large U.S. bank for more than 20 years.

Risk Disclosure
Trading in financial instruments involves high risks due to the fluctuation in the value and prices of the underlying financial instruments. Due to the adverse and unpredictable market movements, large losses exceeding the investor’s initial investment could incur within a short period of time. The past performance of a financial instrument is not an indication of its future performance. Investments in certain services should be made on margin or leverage, where relatively small movements in trading prices may have a disproportionately large impact on the client’s investment and the client should therefore be prepared to suffer significant losses when using such trading facilities.

Please make sure you read and fully understand the trading risks of the respective financial instrument before engaging in any transaction with Doo Prime’s trading platforms. You should seek independent professional advice if you do not understand any of the risks disclosed by us herein or any risk associated with the trade and investment of financial instruments. Please refer to Doo Prime’s Client Agreement and Risk Disclosure Statement to find out more.

This information is addressed to the general public solely for information purposes and should not be taken as investment advice, recommendation, offer, or solicitation to buy or sell any financial instrument. The information displayed herein has been prepared without any reference or consideration to any particular recipient’s investment objectives or financial situation. Any references to the past performance of a financial instrument, index, or a packaged investment product shall not be taken as a reliable indicator of its future performance. Doo Prime and its holding company, affiliates, subsidiaries, associated companies, partners, and their respective employees, as well as managers, make no representation or warranties to the information displayed and Doo Prime and its holding company, affiliates, subsidiaries, associated companies, partners and their respective employees, as well as managers, shall not be liable for any direct, indirect, special or consequential loss or damages incurred a result of any inaccuracies or incompleteness of the information provided. Doo Prime and its holding company, affiliates, subsidiaries, associated companies, partners, and their respective employees, as well as managers, shall not be liable for any direct, indirect, special, or consequential loss or damages incurred as a result of any direct or indirect trading risks, profit, or loss arising from any individual’s or client’s investment.

Share to

Expert Opinion

U.S. Stocks Rally On Investors' Optimism And Fed Comments

Fed Chair Jerome Powell's shift in tone during Friday's speech potentially contributed to the U.S. stocks and bonds upbeat close.

2023-12-4 | Expert Opinion

U.S. Stocks See Fourth Week Of Growth, Nvidia's Slide

U.S. stocks ended higher last week. Nvidia Corp. slid after reports that the company delayed the launch of a new AI chip for its Chinese customers.

2023-11-27 | Expert Opinion

Stocks Rally, Yield Decline, And Prospects Of Rate Cuts

U.S. stocks ended the week with marginal changes, marking a three-week streak of gains amidst a backdrop of declining Treasury yields.

2023-11-20 | Expert Opinion