There’s a key question percolating in the minds of many investors right now: “Why are stocks up today?”
Interest rates are still rising, as evidenced by moves made by the Bank of Canada and the Reserve Bank of Australia in recent weeks. This comes as inflation remains hot, the job market remains robust and all indications are that the economy can handle higher rates. Generally speaking, that’s negative for risk assets, particularly equities.
However, today’s impressive move higher has resulted in the
S&P 500 hitting the $4,300 level for the first time in nearly a year. This move also caps a very strong month, with stocks moving higher in a relatively orderly fashion.
Such moves may not have been anticipated by investors last year, given the strength of the downside move in most stocks. However, with this string of gains, the S&P is now back into technical bull market territory. Thus, there appear to be plenty of investors betting on the idea that algorithmic traders could continue to push stocks higher as momentum factors kick into play.
Let’s dive into what investors should make of this move — and where stocks could be headed from here.
Why Are Stocks Up Today?
This recent winning streak seen in the stock market is one I didn’t foresee happening in 2023. Indeed, the fact that indices have performed so well with rates so high has perplexed many analysts. In fact, many analysts still believe that an earnings recession is around the corner.
For now, the economy appears to be able to handle these higher rates. And while banking stresses remain, the fact that the debt ceiling debacle is now behind us appears to be adding support to the idea that stocks could broadly head higher.
Now, it is worth pointing out that most major indices are dominated by just a handful of stocks. This means that overall breadth in the market (the proportion of stocks moving in the same direction) remains low. That could pose risks to stock pickers focused on lower-market-capitalization companies, at least for now. But for passive investors holding various market index funds, 2023 is shaping up to be a decent year.
We’ll have to see whether today’s momentum can continue and this rally really has legs from here. Indeed, a recession could be right around the corner. That’s the uncertainty most investors are still grappling with. But at least for now, investors appear to be taking a more bullish stance to risk, with some rotation out of fixed income and into equity markets propelling risk assets higher.
On the date of publication, Chris MacDonald did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
