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Investors ‘wait and watch’ as Fed signals earlier rate hike

Investors ‘wait and watch’ as Fed signals earlier rate hike

Last Updated: ‎‎‎‎‏‏‎ ‎
January 24, 2023

This week’s update is co-authored with Novia Raihanah (Head of Data Operations) and Hui Si Tan (Data Analyst)

No panic yet, just concern

USD Interest Rates and the VIX ‘Fear’ Index both went up after the Fed (Source: Bloomberg)

Last week the US Federal Reserve has announced that as the US economy improves, they will be moving up their interest rate hike schedule from the current rock bottom levels. They also increased their inflation expectations for this year.

US interest rates and the VIX ‘Fear’ index both rose following the announcement. S&P500 (which usually has a short term inverse relationship with VIX) dutifully declined.

Our investors are keeping cool …

Activity slowed down

Source: Canopy Data and Analytics

As seen in the chart above, there has been a gradual slowdown in investor activity since January this year. In the previous post, we had noted that activity had started to pick up towards the end of May as investors seemed to be waking up. However this week we saw investors once again exercising restraint in their trading activity, while waiting for the story to further unfold …

Tech continues to rule

Technology stocks have done really well during the pandemic. In what seems to be almost a deliberate dismissal of the Fed’s action, investors are still enamored with Technology stocks. Tech buying surged in June (dark grey in the chart below).

Cyclicals are in

Outside the Tech obsession, we have been seeing sustained interest in cyclical stocks. This is consistent with a rapidly improving economy (and the Fed’s assessment of it). Our investors bought Consumer Cyclical, Basic Materials and Energy sectors.

We also saw a loss of interest in Financial (in teal below) and Consumer Defensive (non-cyclical, in green below) sectors.

Source: Canopy Data and Analytics

Conclusion (tl;dr)

  • Investors are showing signs of caution amid increase in volatility and US interest rates
  • Clear uptick in demand for cyclical, notably in Basic Materials and Energy but selling off financial and consumer defensive stocks
  • Technology stocks are still piquing investors’ interests

Please note that this newsletter is just a data analysis of actual investor behavior and does not constitute investment advice in any form.