In a surprising turn of events, investors who initially missed out on this year’s unexpected stock market rally are now cautiously re-entering the US stock market, according to data from a Bank of America survey. Global fund managers have significantly increased their exposure to US stock this month, marking a record surge in allocations, based on data dating back to 1999. Furthermore, September has seen global fund managers allocate an unusually high proportion of their portfolios to US equities for the first time since last August.
This shift in strategy indicates that investors who had been on the sidelines, observing the consistent ascent of equities throughout the year, are now taking steps to deploy their sidelined cash into the stock market, as some investment experts suggest. Notably, the benchmark S&P 500 index has defied the expectations of Wall Street skeptics by climbing approximately 15% this year, even as the Federal Reserve continued to raise interest rates to combat inflation.
Saira Malik, Chief Investment Officer at Nuveen, believes that a fear of missing out (FOMO) has gripped some investors as they witness the stock market’s resilience. The late-summer plateau in the rally, especially among mega-cap technology stocks that had been leading the surge, has presented an opportunity for these investors to buy the dip.
In contrast to earlier months, the S&P 500 has experienced a 2.4% decline in September, following a 1.8% loss in August—its second losing month this year. Prominent technology companies like Nvidia, Apple, and Microsoft have also seen declines of 14%, 7%, and 2%, respectively, this month. Additionally, market analysts anticipate that the Federal Reserve is approaching the conclusion of its rate-hiking cycle. While the data-dependent central bank maintained interest rates this Wednesday and hinted at the possibility of one more rate hike this year, traders remain divided on whether the central bank will proceed with a rate hike or opt for a pause in December, according to the CME FedWatch Tool.
The belief that the Federal Reserve is nearing the end of its rate hikes has, in turn, brightened the prospects for a potential soft landing—a scenario in which inflation gradually subsides to the central bank‘s 2% target without triggering a severe economic downturn, as explained by Malik. Throughout the year, robust spending and a resilient job market have played crucial roles in supporting the economy amid the Federal Reserve’s gradual interest rate increases.
Saira Malik noted, “[Investors] were holding their cash saying, ‘okay, when the recession comes, I’ll put my money back into the market.’ Instead, we have not seen a recession.”
Nonetheless, bond yields have risen to their highest levels since 2007 this week, as investors speculate that the central bank will maintain higher rates for an extended period. This could potentially exert downward pressure on stocks, along with the recent surge in oil prices, which surpassed $90 a barrel last week for the first time in nearly a year.