Stocks Roar in November as Fear of Rate Hikes Subsides
Amid fears of higher interest rates, stocks that had previously suffered a decline made a strong comeback during the November market rally. The small cap Russell 2000 Index, which had been largely avoided, gained more than 9% and the S&P regional bank index rose more than 16% during the month, including a more than 2% gain in a single day.
Meme stocks also surged in November, with the Roundhill Meme ETF rising more than 20% and the meme stock favorite GameStop moving up over 20% on a single day.
FOMO Rally
Interactive Brokers chief strategist Steve Sosnick described the trend as a “fear of missing out” or FOMO, driven by the expectation that interest rates would decrease, resulting in a rise in risk assets.
Institutional investors were caught “flat footed” when the S&P 500 bottomed in late October. According to eToro US investment analyst Callie Cox, investors were least exposed to equities in over a year.
Investors piled into interest-rate sensitive sectors throughout last month, chasing performance. Real Estate and Technology gained more than 12% and Financials and Consumer Discretionary rose more than 10%.
The Active Managers Index, at its highest level since the AI driven rally during the summer, indicates that many institutional investors are moving into high duration sectors, signaling the potential for a rate cut trade that could last until the end of the year.
Federal Reserve’s Stance
The Federal Reserve, however, has sought to temper expectations about rate cuts, with Fed Chair Jerome Powell stating that it would be premature to conclude with confidence that a sufficiently restrictive stance has been achieved.
Invesco Chief Global Market Strategist Kristina Hooper believes the Fed is “incentivized” to talk markets down so that financial conditions do not ease too far and pose an upside risk to inflation. However, she also thinks that a rate cut is likely, as inflation is coming down.
While some have expressed concerns that investors are too bullish on stocks despite numerous headwinds, indicators within the market are not yet flashing red. Bank of America’s Sell Side Indicator remains “more bearish than bullish,” indicating that the market is still far from being dominated by high conviction and euphoria.
The rally in stocks, driven by the expectation of rate cuts and a fear of missing out, has been a dominant theme throughout November. Investors are cautiously optimistic about potential rate cuts and the future trajectory of the stock market, but remain wary of the uncertainties that lie ahead.
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