Here's what's driving the 2023 stock market rally
Markets have turned downright frisky, as the fear of endless Federal Reserve rate hikes fades.
Driving the news: The S&P 500 posted its third-straight gain of more than 1% on Thursday. The Nasdaq continued its recent romp too, rising 3.3%.
- So far in 2023, the Nasdaq — which is especially sensitive to falling interest rate expectations — is up a rip-roaring 16.6%.
Zoom in: Facebook's parent company, Meta, was a massive winner Thursday.
- Its shares jumped 24.4% after news that it was about to get a favorable ruling in an antitrust suit filed against it by FTC, and its own announcement of better-than-expected earnings and a plan to dump $40 billion into repurchasing stock.
- Other tech giants surged as well.
Between the lines: As is often the case, the real driver of the stock market is actually the bond market.
- The Fed's skimpy quarter-point rate increase on Wednesday, and chair Jerome Powell's clear acknowledgment of the inflation slowdown, have investors betting that few — if any — hikes for the Fed funds rate are still to come from the central bank.
- We know this from looking at data from the market for Fed funds futures, where investors speculate and hedge positions using futures contracts on the short-term rate that the Fed raises (or lowers) to slow (or stoke) the economy.
State of play: Data provided by the CME Group, where Fed funds futures trade, show the market-implied odds of the Fed funds rate hitting 5% at the central bank's May meeting have fallen rapidly in recent months.
- Context: This is despite official statements by the Fed that it expects to get to 5% this year (the target range is now 4.5%-4.75%).
- Back in November, before the Consumer Price Index started to show that inflation was slowing sharply, the odds were upward of 70%.
- Now, the futures market puts odds of the Fed raising the rate to 5% — that would likely be a quarter-point increase at the next two meetings — at basically one in three.
The big picture: Decent Q4 earnings reports, coupled with easier-than-previously-thought Fed policy and better-than-expected gross domestic product numbers, have given the markets a heckuva lift to start the year.
The other side: Not everybody believes this rally is for real. Mike Wilson, an equity strategist at Morgan Stanley, says the upsurge is another head fake and investors are mired in a bear market.
- "What's happening now is just another bear market trap, in our view, as investors have been forced once again to abandon their fundamental discipline in fear of falling behind or missing out," Wilson wrote earlier this week.