Since the Federal Reserve revealed its intentions to taper monetary policy, hedge funds have been diminishing their exposure to risk, new data show. But retail traders are piling into stocks, offering support to the leading benchmark indexes.
The numbers are comparable to the Bank of America’s research. The financial institution recently reported that hedge funds are deleveraging, dumping more than $2 billion at the beginning of December. This is the fastest rate since April.
Be it the S&P 500 or small-cap stocks, exits from positions have been broad-based, and the reasons for this shedding of stocks also vary.
Goldman Sachs stated that some money managers have alluded to tax-loss harvesting, and others want to take their 20 percent in gains and run. Many are also pointing to the U.S. central bank’s shift in monetary policy as it attempts to fight 39-year high inflation.
When the Wall Street giants published the data, Fed Chair Jerome Powell had retired the term “transitory” when talking about inflation and signaled accelerated tapering of the institution’s pandemic-era quantitative easing stimulus and relief tools.
Despite the exceptional year-to-date rallies for the U.S. chief indexes, they have been in a rough patch in the home stretch of 2021.
Over the last month, the Dow Jones Industrial Average has lost about 0.6 percent. The S&P 500 has tumbled approximately 1.5 percent. The Nasdaq Composite Index has slumped more than 5 percent, while the Russell 2000 Index has declined roughly 7 percent.
Armchair Traders Buying Stocks
Although investors have highlighted their consternation over the Omicron variant and its impact on the global economic recovery, individual traders are not as apprehensive. Recent data spotlight the fact that armchair investors are sticking to their buy-the-dip strategy.Researchers note that vaccine makers, like Pfizer, have also garnered the attention of retail investors.
Armed with their zero-commission mobile trading apps, study authors assert that these investors have been quite aggressive in buying whenever there is a sharp sell-off, resulting in notable retail inflows.
“Retail investors have bought every minor dip in equities this year, shielding the S&P against a double-digit sell-off,” analysts Ben Onatibia and Giacomo Pierantoni stated in a note.
Financial experts warn that this might not always generate massive gains comparable to the meme stock craze from earlier this year, which saw incredible spikes in AMC, GameStop, and a plethora of others.
A Look at the Stock Market in 2022
So, will hedge funds buy back into the financial markets next year? Will retail investors maintain their investment tactics since the coronavirus-induced meltdown in 2020?Wall Street titans have been offering their expectations for 2022, and many market analysts are anticipating a better year.
Price inflation, the Omicron variant, climate change, and supply chain disruptions are leading the factors industry observers will be monitoring, the report stated.
“Inflation will cool from the current highs but remain well above target, leaving the Fed to move into action,” the economists wrote. “While 2021 was a story of excess demand and a dearth of supply, we think 2022 will be one of rebalancing, albeit only gradually. This should take some of the heat off of inflation but not quickly enough, leaving the Fed to hike three times starting in June and continuing on a quarterly cadence.”
“Currently, I see opportunities in financials, energy, and utilities. There’s pretty good dispersion there, which means there is a lot of variation in how different companies within those sectors are priced,” said Ramona Persaud, a Fidelity portfolio manager.
At the end of its two-day Federal Open Market Committee (FOMC) policy meeting, officials agreed to end the central bank’s asset-buying program by March, with the dot-plot indicating multiple rate hikes in 2022.
