It’s incredible how fast things can change. Just a week ago sentiment was in the toilet. The S&P 500 had declined for three consecutive months for the first time since the pandemic. The selloff was widespread too, with just 1 in 10 large-cap stocks above their 50-day moving averages. Interest rates, especially on the long end, were soaring. And a war had broken out in the Middle East.
All that turned on a dime on Wednesday during Powell’s press conference. The takeaway is that the Fed is done raising rates, for now anyway. The spark that Powell lit was doused in gasoline on Friday when we finally got a weaker-than-expected reading out of the labor market. Moderately bad news was absolutely glorious news for risk assets.
The areas of the market that bounced the hardest were those that were hit the hardest by rising interest rates. The chart below shows their performance from 2022 through last week as the 10-year rose from 1.5% to 5%.
The 10-year falling from 5% to 4.55% provided rocket fuel to the names that had been punished by higher costs of capital. The ARK Innovation ETF, arguably the poster child for stocks benefiting from the ZIRP era, had its best week ever, gaining >18%. Regional Banks, whose balance sheets were turned upside down by higher interest rates, gained 12% on the week, its strongest move since November 2020. Zero-coupon bonds had their best week since the first week in January. The S&P 500 had its best week since November 2022.
Will this rally continue into year-end? Who knows? What I do know is that it’s really easy to get bearish when everyone else is, and it’s really hard to stick to your plan when it feels like others are abandoning theirs.
You should always be in a position where you don’t feel like you’re getting left behind if the market rallies but you don’t feel sick if the market unravels. That’s a difficult needle to thread, and that’s different for every investor. Find your safe space then get out of the way.