Stock Market Rally Gaining Momentum Amid Low Volatility and Optimism for Fed’s Inflation Plan

The stock market’s rally has been gaining momentum since the start of the year, with the S&P 500 index up 8 per cent and the tech-heavy Nasdaq Composite up 16 per cent. This follows a turbulent 2022, when the two indexes fell by a fifth and a third, respectively. The optimism is fuelled by investor hopes that moderating inflation could mean an end to the Federal Reserve’s interest rate hikes.[0]

The VIX index, which tracks investor expectations of volatility over the next month and is often referred to as Wall Street’s “fear gauge”, has plunged since the start of the year.[1] The volatility has been lower than its long-term average of 20 for two weeks in a row, representing the longest period of low volatility since the beginning of last year.[1] The one-year VIX, which tracks expectations of stock market swings over the next year, this week touched its lowest level since the onset of the coronavirus pandemic.[2]

The assets that suffered the most during last year’s market crash are now the top performers.[1] Bitcoin has seen an increase of more than 40%, while Cathy Wood’s ARK Innovation fund, heavily comprised of stocks with high growth potential, has risen 46%.[2]

The optimists’ argument has been strengthened by the sudden improvement in the worldwide economic situation.[2] At the beginning of 2020, the International Monetary Fund (IMF) was concerned that one-third of the world was heading towards an economic downturn. However, this week, the IMF has revised their forecasts and declared that the global economy is “well away from any (sign of) global recession.”[1]

Confidence amongst investors is growing that the Federal Reserve can control inflation without a major economic downturn.[1] Fed Chair Jerome Powell last week appeared relaxed about the recent gains, noting that “our focus is not on short-term moves” and declaring for the first time that “the disinflationary process has started.”[1]

The sudden surge in risk appetite has sparked a “fear of missing out”, with investors eager to get in on the rally.[1] Mike Lewis, head of U.S. equity cash trading at Barclays PLC, said: “There is a lot of cash on the sidelines after last year and that creates a conundrum (for investors), people don’t want to miss a rally … you get a little bit of FOMO.[2]

0. “The Stock Market Is Rallying. Will It Last?” msnNOW, 8 Feb. 2023, https://www.msn.com/en-us/money/markets/the-stock-market-is-rallying-will-it-last/ar-AA17fyqW

1. “Investors pile into market rally as economic slowdown risk ebbs” Financial Times, 5 Feb. 2023, https://www.ft.com/content/53b883de-decf-4d84-bb5e-661bb855b1fd

2. “FOMO fuels market rally as investors assess risks of a recession are receding” Financial Post, 6 Feb. 2023, https://financialpost.com/investing/fomo-fuels-market-rally-investors-recession