By Carolina Mandl and Saqib Iqbal Ahmed
(Reuters) – Softer-than-expected U.S. inflation is bolstering the case for cash-heavy investors to step off the sidelines and plunge into dangerous assets, though many remain skeptical on how far stocks can run without further evidence that consumer price pressure will keep declining.
Thursday’s massive rally within the S&P 500 showcased investors’ hunger for upside after a bruising yr in stocks and bonds, because the index soared 5.5% to its biggest each day gain in over 2 1/2 years on signs that U.S. inflation could also be turning the corner.
As equities rallied, the dollar, a well-liked redoubt of risk-averse investors this yr, notched up its sharpest someday drop in years against multiple currencies while Treasury yields tumbled. The S&P is 10.6% above its Oct. 12 closing low for 2022, though still down 17% for the yr.
Market participants said investors’ rotation out of enormous money positions and into stocks likely contributed to the outsize move and will fuel further gains in equities and other dangerous assets – although many were removed from convinced that the tough times for stocks were over.
“There’s loads of liquidity on the market. Money market balances are huge. You’ve fear of missing out,” said Michael Farr, chief executive of investment advisory firm Farr, Miller & Washington. “In case you’re sitting in money and the market rallies, you would possibly think you were greedy waiting for an even bigger discount.”
Institutional investors’ exposure to stocks was low going into Thursday’s inflation report. Discretionary and systematic investors have increased positions in stocks over the past two weeks, but equity positioning was still lower than it had been for about 87% of the time since January 2010, based on a Deutsche Bank report published on Nov. 4.
At the identical time, market volatility and better rates of interest have bolstered the allure of money this yr. Last month’s fund manager survey from BofA Global Research showed investors’ money levels at their highest since April 2001.
“There are various institutional accounts which are under-risk and, as we catch up with to the tip of the yr, individuals develop into way more momentum-oriented. They don’t need to miss the market an excessive amount of,” said Christopher Harvey, head of equity strategy at Wells Fargo Securities.
“We predict there’s some more near-term upside, but we can’t get too enthusiastic about that. It isn’t a bull market.”
A part of the rise was also fueled by bearish investors rushing to unwind trades. An index of shorted firms monitored by Wells Fargo rose 10% on Thursday, nearly double the S&P’s gain, suggesting that investors were unwinding bets, Harvey said.
Thursday’s data showed the patron price index (CPI) had risen lower than expected in October, pushing the annual increase below 8% for the primary time in eight months. It was the strongest sign yet that inflation was slowing, which could allow the Federal Reserve to cut back its hefty rate of interest hikes.
“Systematic strategies were arrange completely incorrect for this CPI print today,” said Mike Lewis, head of US equity money trading at Barclays.
Lewis said he had not seen so-called real money – a term for mutual funds, pension funds and other non-leveraged market investors – participating in Thursday’s rally, though he saw no evidence of selling from that cohort, either.
Lewis believes the rally is unlikely to last until “we get more data like this CPI print, and with similar velocity.”
It was a sentiment shared by Michael Purves, chief executive at Tallbacken Capital Advisors, who believes the S&P could climb to 4200, some 6% above Thursday’s close.
Still, he doesn’t think risk assets are out of the woods yet.
“I’m not being very bearish. I just do not know whether this implies it is best to start buying every dip you get,” Purves said. “We’d like loads more confirming evidence.”
Analysts at Capital Economics, meanwhile, said relief at signs of cooling inflation would eventually be overtaken by worries over a looming global recession, a results of furious tightening by the world’s central banks. They forecast the S&P 500 falling to 3200 in 2023.
“While equities received a lift today from lower real ‘secure’ asset yields, and we predict this tailwind will persist, we still expect it ultimately to be greater than offset by concerns over the economic outlook,” they wrote.
(Reporting by Carolina Mandl and Saqib Iqbal Ahmed; Additional reporting by Ira Iosebashvili; Editing by Ira Iosebashvili and Bradley Perrett)
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