All three major stock indices are up to begin the trading week as investors continue to bet that the U.S. Federal Reserve is done raising interest rates.
While the market gains aren’t as robust as last week when the benchmark S&P 500 index rallied 5% and posted its best weekly performance of the year, today’s move higher builds on the current momentum and shows that traders and investors are turning their attention back towards equities after a downturn that took markets lower between August and the end of October.
Hedge Funds Buy U.S. Equities
A newly released report by investment bank Goldman Sachs (NYSE:GS) has found that hedge funds are buying U.S. stocks at the fastest pace in two years. According to Goldman, global hedge funds have started to aggressively buy U.S. equities as expectations grow that the Fed is indeed done raising rates. Over the past week, hedge funds went on the largest five-day buying spree of U.S. stocks since December 2021, which is when the market last peaked before heading into a bear market.
In particular, hedge funds have been increasing their positions in technology stocks, building their largest stakes in tech concerns in nearly eight months. Hedge funds have also been buying up shares of beaten-down consumer discretionary companies such as restaurants and fashion retailers, according to Goldman Sachs. Hedge funds were net sellers of healthcare and financial stocks in recent days, according to the investment bank’s data that was issued in a note to clients.
Berkshire Hathaway’s Record Profit
Over the weekend, markets also got some good news with the release of Berkshire Hathaway’s (NYSE:BRK-A, NYSE:BRK-B) third-quarter financial results. The holding company of Warren Buffett announced that its Q3 operating profit rose 40% from a year earlier to reach a record $10.8 billion. The company, which owns a myriad of businesses ranging from the Dairy Queen restaurant chain to BNSF Railway, also posted a record amount of cash on hand at the end of the quarter, totaling $157.2 billion.
The record results come as Buffett has taken advantage of surging bond yields, buying up short-term Treasury bills yielding at least 5% or greater over the past few months. Berkshire Hathaway had $126.4 billion worth of U.S. Treasuries as of Sept. 30, up from $93 billion at the end of 2022. Geico, Berkshire’s top insurance company, reported another profitable quarter with $1.1 billion in earnings. While the company’s investment portfolio declined in Q3, the overall numbers from Berkshire, considered a market bellwether, were very strong.
Bond Yields Stay Under 5%
While bond yields are up slightly today, the benchmark 10-year Treasury is currently holding steady at 4.649%, which is below the psychological threshold of 5% that tends to make investors nervous. The rally in stocks over the past week has coincided with a drop in bond yields, which had previously spiked in October, pushing equities lower.
Analysts say a sustained rally in stocks will likely require that bond yields continue to retreat heading into year-end. Markets seem to be pricing in a pullback in bond yields along with peak interest rates, especially after the October jobs report showed weakness in the labor force. The latest employment data indicated that the U.S. economy is finally slowing after the Fed raised interest rates 11 times since March 2022, totaling five percentage points.
What’s Next
We’ll see how markets hold up in the coming days. Things could change. But right now, it looks like conditions are coming together for a year-end Santa Claus rally as the conditions once again look favorable for stocks.
On the date of publication, Joel Baglole did not have (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.
