U.S. stocks closed higher on Friday, June 9th,2023 with the S&P now in bull market territory led by technology stocks.
Earlier in the week, the markets were tested when Canada and Australia unexpectedly raised interest rates.
However, the tone shifted on Thursday as jobless claims reached their highest level since October 2021, coupled with weak ISM data and lower-than-expected factory orders. These factors collectively suggest a potential economic slowdown that may deter the Federal Reserve from raising rates in the upcoming week.
Currently, the markets are pricing in a 33% chance of a rate hike next week, with a 90% chance of a hike in July.
During the week, the S&P 500 exited bear-market territory by closing 20% above last year’s October lows, resulting in a 0.4% gain for its fourth consecutive positive week. The Nasdaq eked out a 0.1% advance, marking its seventh straight winning week, the longest streak since 2019. The Dow Jones finished up with a 0.3% gain.
Market watchers were encouraged by the breadth of the recent rally, including the rise of the small-cap stocks, as the Russell 2000 rose 1.9% this week.
Here are the closing levels on Friday, June 9th, 2023:
As mentioned last week, the market is starting to show signs of tiredness.
While it’s true that we witnessed another week of positive gains, pushing the S&P into a theoretical bull market, the magnitude of these gains is relatively small compared to previous weeks.
Naturally, after such impressive gains, it is expected to see a slowdown in the rate of gains. However, to definitively establish a bull market, it would be necessary to surpass the highs achieved in 2021.
Once again, the markets have defied expectations by rising despite anticipated Fed rate hikes and weaker economic indicators signalling a potential slowdown or even recession.
Throughout the past year, I have often found it perplexing how the market can experience a rally despite a slowdown in economic activity. The rationale I have been given is that the Federal Reserve will lower interest rates in response to an economic slowdown. However, this reasoning appears to overlook the persisting issue of inflation.
Investors are currently experiencing FOMO (fear of missing out) amidst the excitement of the AI-related rally. The market appears to be in a long position, and there is a high likelihood that it could continue to extend further, frustrating short-sellers at each rebound.
While the shorts may eventually be proven right, considering the inverted yield curve and the Fed’s approach of maintaining higher rates for an extended period, the question remains how much pain they are willing to endure before a significant selloff occurs.
For now, short-sellers find it challenging to resist this FOMO-driven rally, and it is likely to persist for a considerable duration.
Source: CBOE, Bloomberg
This commentary is written by James Gomes, a seasoned finance industry veteran with extensive experience of over 30 years, including a substantial tenure at a reputable U.S. bank exceeding 20 years.
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