S&P 500 exchange traded funds’ 20% bounce from the October low and a move above the 200-day moving average has lifted optimistic expectations for a late-year rally in stocks.
The violent rebound in stocks this month has caught many investors by surprise, judging by the amount of cash on the sidelines and recent sentiment polls. Underinvested money managers could pile on in a bid to boost 2011 performance after the nasty summer sell-off.
Elevated volatility in the stock market reflects uncertainty over the global economy recovery and Europe’s ability to put out its sovereign debt fire.
Investors are weighing two main scenarios, said Stephen Cucchiaro, chief investment officer of Charles Schwab subsidiary Windhaven Investment Management.
Markets are trying to discount the odds of slipping “back into global recession” or a “muddle-through” period in which slow growth continues in a steady recovery, he said in a recent call with reporters.
“If we get a global recession, then markets could fall hard,” the CIO said. “If we avoid recession, then markets are undervalued.”
There are three main risks to stock ETFs, he outlined. Europe’s debt crisis needs to be resolved. Also, the U.S. needs to deal with its deficit, which will be difficult with gridlock in Washington.
“The status quo is not an option,” Cucchiaro said. “The longer it goes on, the tougher it will be to get out.”
Finally, there is China. The country has helped lift the global economy but there are fears of inflation, which could to rate hikes and a potential hard landing, he added.
From a technical perspective, ETFs tracking major stock indexes such as the S&P 500 and Dow breaking above their 200-day exponential moving averages could also trigger buying from investors and advisors who use the indicator to position portfolios.
The iShares S&P 500 (NYSEArca: IVV) was up 3.4% year to date as of Thursday’s close, according to Morningstar.
iShares S&P 500
The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.