FTSE 100, S&P 500 and Nasdaq enjoy best week in months as investors look for oversold stocks
Wednesday 01 Jun 2022 Author: Steven Frazer

Investors are buying stocks again prompting emerging hope of a summer rally off depressed valuations. The early part of last week saw $20.6 billion pour into equities with outflows from cash at $28.2 billion, according to Bank of America’s top strategist Michael Hartnett.

That’s the biggest show of optimism in 10 weeks, the strategist said in a note to clients. ‘A summer rally bandwagon is growing,’ Hartnett said as investors price in ‘peak inflation’ and expectations that the Federal Reserve won’t become any more aggressive on its plan to lift interest rates.

The US central bank is trying to rein in high inflation by raising short-term rates, which is meant to curb economic demand. But Fed minutes on 25 May revealed that it might not implement any more rate hikes beyond those already planned, with some readings of the minutes even suggesting that rate hikes could slow down, as economic growth has already begun to ease.

Last week saw the S&P 500 index snap a run of seven consecutive weeks of losses, closing Friday (27 May) up more than 6% on the week at 4,158.24. The tech-heavy Nasdaq Composite closed 6.5% higher at 12,131.13, its highest since the start of May.

While investors that Bank of America’s Hartnett has been talking to remain in bearish mood overall, the strategist pointed to the investment bank’s Bull & Bear Indicator at 0.6, ‘yielding an unambiguous contrarian buy signal,’ Hartnett noted.

Bank of America’s bull and bear indicator is in ‘extreme bearish’ territory, and Hartnett says there are many oversold assets relative to their 200-day averages, which make them primes for a tradeable bounce. Among them, the strategist listed the 30-year US Treasury, high yield bonds, Chinese and German stocks, US banks and tech stocks, consumer stocks in the US, European Union and China, and industrials in Europe.

This cautious optimism for stock markets is reflected on both sides of the Atlantic. ‘US investor sentiment bounced off its recent low from the previous week, to end last week still bearish but not as hopeless,’ said Olivier d’Assier of Qontigo, the investment intelligence and index operator.

‘European investor sentiment halted its decline of the previous week, returning to the (less) bearish levels of March, and ended last week only slightly negative.’

A more positive set of corporate earnings is helping lift sentiment, but d’Assier and his colleagues note that investors have implemented risk-averse strategies for the better part of 2021 on inflation concerns and have done so as well for all of 2022 so far. ‘This prolonged popularity of risk-averse assets versus risk-tolerant ones, has made the former rather pricey and the latter potentially attractive again. This helps explain bouts of bargain-hunting among tech stocks,’ said d’Assier.

First-quarter profits and sales from US department stores chain Macy’s (M:NYSE) on 26 May came in ahead of analyst expectations as shoppers returned to malls to buy new outfits, luggage and luxury goods in spite of decades-high inflation that has threatened to curtail consumption.

The chain, which also owns Bloomingdale’s, reaffirmed its fiscal 2022 sales outlook and raised its profit guidance, expecting stronger credit card revenue for the remainder of the year, sending the stock soaring 30% last week.

Similarly, discount retailer Dollar Tree (DLTR:NASDAQ) followed up a robust showing from some of its peers to suggest some of the concerns about US consumer spending may be overdone and investors moved to take advantage of what they perceived as oversold opportunities, a relief for the US retail sector following the recent earnings disappointment from Target (TGT:NYSE).

In the UK, Rishi Sunak’s controversial windfall tax on energy companies could help cap worries of sky-rocketing inflation increasing and give a similar lift to UK consumers. Earlier this month saw April retail sales unexpectedly rise as shoppers bought more alcohol from supermarkets, suggesting people are reacting to rising prices by staying at home rather than going out.

Between 23 May and 27 May the FTSE 100 posted its biggest weekly gain since March, closely tracking major US markets.

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