A powerful rally in technology and growth stocks helped drive the stock market higher in its best week of the year. The S&P 500 was up about 6.2% for the week, ending at 4,463. The Nasdaq was up 8.2%, and the Dow gained 5.5%.
With the Federal Reserve’s first rate hike out of the way, market pros are now debating whether the market can continue the upswing it started in the past week.
Some of the names that had been most punished like airlines, were among the biggest winners on the week. Airlines were up about 14.7% for the week. High growth names also bounced, with the ARK Innovation Fund, a poster child for growth, jumping about 17.4%. The fund is still down more than 46% over the last six months.
Consumer discretionary stocks gained more than 9% as the top performing sector, followed by technology, up about 7.8%. Energy was the only major sector to decline, falling 3.6%.
Ukraine will continue to be a focus, and headlines could continue to create volatility in the coming week. Investors are also watching the course of Covid, which is causing shutdowns of Chinese cities and is spreading again at a higher rate in Europe.
There are more than a dozen Fed speeches, including from Fed Chairman Jerome Powell who appears at an economics conference Monday and at an international banking conference Wednesday. The economic calendar is relatively light, with durable goods and both services and manufacturing PMI released Thursday.
“The anticipation of the first rate hike did more damage than the rate hike itself. We got ourselves twisted in a knot, starting in December, with the Fed pivot from transitory inflation to tapering” [bond purchases], said Art Hogan, chief market strategist at National Securities. “That’s kind of behind us now as a headwind. That diminishes the impact that any parade of Fed speakers will deliver.”
The market indeed ignored hawkish comments Friday from St. Louis Fed President James Bullard and Fed Governor Christopher Waller, who appeared on CNBC. Both said they want to raise rates faster than the median seven hikes the Fed expects this year.
The Fed released its interest rate forecast Wednesday, when it raised its fed funds target rate range by a quarter point to 0.25% to 0.50%, its first rate hike since 2018. The Fed also said it would look to start reducing its nearly $9 trillion balance sheet at an upcoming meeting.
Tech and growth did well in the past week, and they are the stock groups most hurt by higher interest rates. They typically command higher prices because investors buy them for their future earnings, and easy money makes them very attractive.
Strategists say tech can continue to gain in a rising rate environment, now that some of the excesses are wrung out of the group. But they may not be the leaders they once were.
Looking past the Fed
“I think the stage has been set by the Fed for investors to focus on earnings again,” said Julian Emanuel, head of equities, derivatives and quantitative strategy at Evercore ISI. “Bottom line…earnings estimates since the beginning of the year have risen.”
Emanuel said he expects the market could continue to rise in the near term, barring an escalation of geopolitical events. While it appears oil prices may have peaked, he said it is still not clear whether stocks put in the low for the year.
“Sentiment is absolutely horrendous…You put it all together, and we just think it’s a recipe for higher share prices looking out over the next month or two,” Emanuel said. He said investors are now able to discount the fact the Fed has begun its rate hiking cycle.
“We’re there. We know what’s going to happen. We know they’re going to do 0.25% in May. We know they’re going to start QT [quantitative tightening] some time at mid-year,” he said. “They’re not raising rates enough that it’s really going to hurt the market and investors can focus on earnings again.” He expects S&P 500 profits to be up 9.3% this year.
Hogan said the market is leaning towards a favorable outcome for Ukraine, such as a cease fire, although no developments suggest an end is now in sight.
“Everyone is leaning in this direction that this will come to an end in weeks rather than months,” he said. “If not, the market is going to have to recalibrate that.”
This is what the stock charts say
Scott Redler, partner with T3Live.com, focuses on the short-term technicals of the market, and he said after a strong run, the market could digest some of its gains early in the week.