The stock market had a volatile week, as investors grappled with the implications of the Fed’s latest policy statement, the fallout from the bank contagion in Europe, and the mixed signals from the economic data. Here is a summary of the main events and trends that shaped the market this week.
The Fed
On Wednesday, the Federal Reserve announced that it would keep its benchmark interest rate near zero until at least 2024, and that it would continue its monthly bond purchases of $120 billion until “substantial further progress” is made toward its goals of maximum employment and stable inflation.
The Fed also upgraded its economic projections, forecasting a 6.5% growth rate for 2023, a 4.5% unemployment rate by year-end, and a 2.4% inflation rate that would exceed its 2% target temporarily.
The Fed’s dovish stance reassured some investors that the central bank would not withdraw its stimulus prematurely, but also raised concerns that it might be underestimating the inflationary pressures from the fiscal stimulus and the economic reopening.
The bank contagion
On Monday, news broke that a hedge fund called Archegos Capital Management had defaulted on margin calls from several banks, triggering a fire sale of billions of dollars worth of stocks.
The banks that were exposed to Archegos included Credit Suisse (CS), Nomura (NMR), Deutsche Bank (DB), UBS (UBS), Morgan Stanley (MS), and Goldman Sachs (GS). While some banks managed to limit their losses by selling their positions early, others suffered significant hits to their earnings and capital ratios.
The episode sparked fears of a wider systemic risk in the financial sector, as well as questions about the adequacy of regulation and disclosure for leveraged investors.
The economy
The economic data released this week painted a mixed picture of the recovery. On one hand, consumer confidence surged to a one-year high in March, as Americans became more optimistic about the vaccine rollout, the stimulus checks, and the labor market.
Pending home sales also rebounded in February, after a sharp drop in January due to low inventory and high prices. On the other hand, personal income and spending fell more than expected in February, reflecting the fading impact of the previous stimulus round and the adverse effects of the winter storms.
The PCE price index, the Fed’s preferred inflation measure, rose 0.2% month-over-month and 1.6% year-over-year, slightly below expectations.
The big winners and losers
The stock market ended the week with modest gains, as the Dow Jones Industrial Average rose 0.4%, the S&P 500 rose 0.2%, and the Nasdaq Composite rose 0.1%. However, the performance was uneven across sectors and styles.
The energy sector was the worst performer, as oil prices plunged amid rising supply and demand worries. The financial sector also lagged, as bank stocks were weighed down by the Archegos fallout and the flattening yield curve.
The technology sector outperformed, as growth stocks regained some ground after a recent sell-off. The consumer discretionary sector also did well, as online retailers like Amazon (AMZN) and Shopify (SHOP) benefited from strong e-commerce demand.
Investor sentiment
Investor sentiment remained cautious this week, as traders balanced the positive signs of economic recovery with the negative risks of inflation and market instability. The CBOE Volatility Index (VIX), a measure of expected market volatility, spiked above 20 on Monday and Tuesday, before easing back to around 18 by Friday.
The put-call ratio, a gauge of bearish versus bullish bets on options, also rose above 1 on Monday and Tuesday, indicating more demand for downside protection. However, some indicators suggested that investors were still willing to take on risk. The CNN Fear & Greed Index, which tracks seven measures of market sentiment, moved from “fear” to “neutral” territory this week.
The IPO market also remained active, with several high-profile companies going public or filing for listing.
Takeaway
The stock market faced several headwinds this week, but managed to end with slight gains thanks to the Fed’s supportive stance and the improving consumer confidence.
However, investors should remain vigilant for potential shocks from inflation, interest rates, or financial contagion. The market may also experience more volatility in April as earnings season kicks off and more economic data becomes available.
