The quietest week in stocks to date in 2021 makes Wall Street wonder what will break the calm.
Stock trading volume plummeted as the S&P 500 marched to an all-time high, with the five-day average on US stock exchanges falling to 9.5 billion shares traded – the lowest since October, according to Bloomberg dataFriday was particularly quiet, with only 8.7 billion shares in motion, the lowest daily total since Christmas Eve.
The silence felt especially abruptly after 13 months of frenzied trading brought the fastest bear market ever and a furious rally unmatched in 90 years. Independent traders turned online brokers into casinos, while vaccine approvals in November added euphoria and spurred investors to stocks they had shunned for months. Since then, according to data from Bank of America, more than $ 575 billion has flowed into the market, more than the total inflows for the past 12 years combined.
That all changed in April, and there are many theories about what’s behind it. The shopping mania has cooled down as economic constraints eased. Stimulus bets were settled. A short sales period led to higher yields and was put to rest by a chorus of Federal Reserve officials. Economic data is starting to help justify valuations. There are simply lesser problems driving huge market bets. It does not matter, money managers say, the rest will not last.
“We drove 100 miles per hour and now we are back within the speed limit,” Arthur Hogan, chief market strategist at National Securities, said by phone. “We will see a resurgence in volumes and volatility because this year will 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 rallying 1.4% on Monday, the S&P 500 hit three more records to end the week as trading volumes slowed to pre-pandemic averages. The index posted a third consecutive weekly gain and the Cboe Volatility Index fell to its lowest level in 14 months. Fading bets on Fed rate hikes saw the largest weekly drop in 5-year Treasury yields since June.
Traders struck by the pandemic turmoil are unimpressed by the calm and point to signs of more turbulence on the way. Take the VIX. At 17th, it has stubbornly increased from the 14.9 average in the seven years through 2019. Betting that summer will bring more chaos to the market has seen the spread between the VIX and implied 30-day volatility across four months to the widest level in nearly nine years.
Bond markets show similar expectations for fireworks – short-term interest in the $ 14 billion The exchange-traded iShares 20+ Year Treasury Bond fund as a percentage of shares outstanding rose to its highest level since 2017 this week, data from IHS Markit Ltd. shows, even as the ETF rebounded.
Meanwhile, Wall Street forecasters believe that the march that pushed the S&P 500 towards dotcom-era valuations is likely to be exhausted for the year. At a record high of 4,128.80, the index closed on Friday above the strategists’ average year-end target of 4,099 followed by Bloomberg.
Skeptics have cited everything from rising interest rates to overvaluation and potential tax hikes as grounds for caution. Tobias Levkovich, chief US equity strategist at Citigroup Inc. whose 2021 target was 3,800, the Fed expects to reverse monetary stimulus measures later this year and weaken earnings expectations, pushing stocks into headwinds and fueling volatility.
“Sentiment is in very worrying territory, as is valuation, but money flows continue to increase indices higher, ”Levkovich wrote in a note earlier this week. “Huge fiscal stimulus and supportive central banks have created the idea that there is no need to be risk averse,” he added. “Indeed, all developments are experienced 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 to kick off what is expected to be the best earnings season since 2018 to revive the stock, and big lenders like JPMorgan Chase & Co. and Citigroup Inc. will report next week. First quarter earnings of S&P 500 companies are likely to be up 24%, led by automakers, banks and retailers, according to data collected by Bloomberg Intelligence.
“Unless there is some other craziness going on like Covid, earnings always drive the market,” said Forrest, the company’s chief investment officer. “We’re heading into earnings season and the bar is very low, and I think the first quarter was pretty good, so that’s encouraging.”
– With the help of Vildana Hajric and Claire Ballentine