Cautious Optimism Persists in Wall Street, but Bulls are Back in Play
Two weeks into a new year, the stock market is finding itself in a state of cautious optimism, characterized by a mix of long-term positive sentiment and the ever-present risks. This stance is reflected in the majority of stocks sputtering, with economically geared groups registering concern that rising Treasury yields and hawkish rhetoric from Federal Reserve officials could undermine growth.
A recent pullback in the S&P 500, which saw the index drop 5% from its peak, tested its pre-election level, allowing the shadow of worry to encroach on a previously bullish consensus. However, last week’s assertive rally suggests the tape might be better for it, at least for a while.
According to Fidelity’s head of global macro, Jurrien Timmer, sentiment has turned sour, with the Investors Intelligence survey showing only 42% bulls and 32% bears, a sign that the market is now in a better position to move higher. Technical analyst Jonathan Krinsky notes that the mood shift is a start, but it’s not always a perfect contrarian cue.
Real-money field-position data from Deutsche Bank’s strategy group shows that aggregate equity positioning has fallen from its highs near the top of the long-run historical band to a two-month low, about halfway down to neutral. This suggests that investors are becoming more cautious, but not quite yet reaching a “buy when blood runs in the streets” moment.
The observable fundamentals are looking more encouraging, with a strong December jobs report, healthy core retail sales, an upside surprise in industrial production, a cool core CPI reading, and an upwardly revised Atlanta Fed real GDP tracker. Not to mention some unblemished earnings from the biggest banks.
The Street is free to celebrate this positive news, and the bond market has stopped just short of dispensing enough punishment to break the will of the bulls. As the market trades each flash headline about the pace and scope of tariffs, immigrant deportation plans, and deregulatory declarations, it’s clear that the tape will continue to be influenced by these events. However, the underlying market dynamics may be driven by expectations of pro-growth policies and a potential increase in corporate deal flow, which could keep risk appetites elevated unless and until the froth boils over.