Market markets. How sustainable the current rally will be

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About a month after the collapse of several American banks, stock markets continue to grow: from March 8, when it became known about the problems of SVB, S&P 500 has grown by 3.4%, and from the beginning of the year - by 8%. Such an increase has become a surprise for many: most Western investment banks predicted a drop in shares in the first half of the year to new lower classes before the market returns to growth. Why are markets grow and how sustainably is this rally?

Why market markets grow

Typically, the fall of banks is extremely negative in the markets due to the significance of financial institutions for the economy, notes The Economist. In May 1984, when Continental Illinois, a large bank in the American middle West, crashed and was also saved by the Federal Reserve System (Fed), Dow Jones fell by 6%. In September 2008, when the Lehman Brothers investment bank went bankrupt, S&P 500 collapsed by 10%. During the great depression, when one bank was crazy after another, the stock market fell by 89% - between the peak in September 1929 and the bottom in July 1932.

Now nothing like this is observed: S&P 500 is growing many times faster than the average historical 0.5%. The Vix volatility index, which took off above 26 in mid -March, is now in the region of 17.

The most optimistic explanation of the rally for markets: the Fed managed to quickly solve the problems of the banking sector. The consensus, which has developed in the markets in recent weeks, really indicates that the fears about the banking crisis have significantly weakened. The volume of banks lending to the Fed, including an emergency program, begun in March, falls in a fourth week in a row, which indicates a low liquidity need. Since March 17, the index of American regional banks increased by 10%.

But, probably, the growth of market growth was most strongly contributed to a sharp decrease in expectations at bets in March (see the schedule below). The markets quickly came to the conclusion that the Fed will have to more carefully raise the rates due to fears about the full-scale banking crisis. The NASDAQ index, which includes fast -growing, and therefore more sensitive to the rates of the company, has already grown by 16%since the beginning of the year, and in March for the first time in three years officially transferred to the "bull" market.

These expectations began to gradually change after the Fed Stocked the Fed Nevertheless, she decided to increase the rate and sent several “hawk” signals. We talked more about this in the footprint of the meeting in a closed telegram channel available to subscribers of the newsletter.

But in April, inflation data , which turned out to be better than expectations, again increased speculation that the Central Bank would have to increase the rates less. At the same time, the labor market is still overheated. After the data release on it, traders lay 84%of the probability of increasing the rate at the Fed meeting in May, although on April 4 they estimated it at 45%.

All these factors act multidirectional, as can be seen from the fluctuations on the schedule above - there is no dominant narrative now. General expectations for the growth of the rate prevail, but this did not stop the growth of the stock market in recent weeks.

Now the expectations on bets are taken into account in the bond market, where the bets have grown again in connection with the banking crisis, but not in the shares, notes John Oters, Bloomberg editor. Multipliers, which have been reduced over the most part of 2022 due to fears about the growth of bets, continue to grow.

In general, the behavior of trading participants in the stock markets and bonds now indicates their confusion, which is expressed in different ratings of the recession, the agency is given by the analyst from Mizuho International. The managers of bond funds are confident in the inevitability of a recession due to growth in bets and argue only about its depth, while shares markets believe that there will be no serious blow on profits.

How stable the current rally in the stock market

Supporting the markets in the last week could be a successful start of the reporting season: according to FactSet, out of 9% of S&P 500, which reported by the morning of the environment, 84% went around the forecasts for profit per share. Although some top managers of retail banks, who, according to traditions, were one of the first, warned that the recession was just around the corner, the balance of households, supported by the stimuli of the pandemic time, are still strong.