The battered retail crowd appeared to be awakening -- again -- at least when it comes to meme stocks. AMC Entertainment climbed 9% over the week, while Bed Bath & Beyond Inc. snapped an 11-week streak of losses, jumping more than 10%.
Similar enthusiasm isn’t evident among the pundit class. Citing everything from a looming earnings contraction to persistent Fed tightening, strategist at firms from Morgan Stanley to JPMorgan Chase & Co. warned the S&P 500 is likely to test its 2022 lows next year. In the worst-case scenario, the team at Morgan Stanley sees the index reaching 3,000, or a 26% drop from Friday’s close.
Investors have been replaying the same basic drama all year. A bounce starts either amid oversold conditions or because of Fed hopes, forcing a short squeeze and prompting rules-based momentum traders to buy stocks. That leads to a tempting, technical-driven rally that gets legs but ultimately crashes. In August, it was Chair Powell’s Jackson Hole speech that deflated the euphoria. Two months before that, it was a hot inflation print.
That said, one difference stands out from the summer rally: market leadership. Back then, technology shares led the rebound as investors snapped up beaten-down firms. This time, economically sensitive and cheap-looking stocks such as raw-materials and industrial producers are in favor.
“It’s less of the speculative fringes. Technology is not participating as much,” said Art Hogan, chief market strategist at B. Riley Wealth. “There’s more durability to this rally because it’s broader.”
Amid all the failed market bounces, institutional investors -- pensions, mutual funds and hedge funds -- have pulled back. Their net equity demand has shrunk by $2.1 trillion this year, according to an estimate from JPMorgan strategists including Nikolaos Panigirtzoglou.
That may lay the groundwork for progress in the future. Should their positioning return to the long-term mean in 2023, the JPMorgan team’s model shows, that would amount to an increase of $3.3 trillion of stock purchases.
The big question is, are these pros willing to ramp up their holdings in the face of a murky outlook?
Bryce Doty, senior vice president at Sit Investment Associates, says his firm is in the buying mode as Powell stopped drawing the parallel to the inflation era of the 1970s and refrained from saying rates needed to go high enough to destroy jobs.
“It’s a major inflection point or change from the myopic, dogmatic, damn-the-torpedoes, full-steam-ahead and demand destruction rhetoric,” Doty said. “I know that the market will seem a little confused from time to time and things might be choppy, but I left the buy-the-dip camp a year ago. I’m back.”
--With assistance from Vildana Hajric.