Stock Market Investors Celebrating the Positives, Adjusting to the Negatives

The major U.S. cash market stock indexes are expected to open higher based on the early futures trade. Today is the fourth day this month that appetite for risk is on. This suggests investors are hedged against any negative trade news and are primarily focusing on the upside potential of these indexes.

That being said, let’s focus on the positive factors driving the market higher today.

Investors seem to have absorbed the widely expected Fed June interest rate hike and have taken protection against further rate hikes later this year. There was a time in the past when a Fed rate hike would spook stock market investors into selling. However, transparency by the Fed has eliminated the element of surprise, allowing investors to hedge their investments against rising interest rates.

We saw in February what inflation fears and a spike in the 10-year U.S. Treasury yield could do to volatility and stock prices. After the initial shock sent stock prices plunging lower, investors learned from the experience, made their necessary adjustments and stocks moved forward. Just this past week, the NASDAQ Composite hit a record high.

The current price action suggests investors are confident in Fed monetary policy, and fears of a market bubble seem to have dissipated. Furthermore, if there is a bubble, I don’t think the Fed should be blamed if it bursts since it has been quite open about how it expects to handle the onset of inflation although investors aren’t clear about the number of rate hikes later this year.

If you look at the charts, you’ll see that this current leg of the rally essentially started in mid-May when the Fed minutes revealed it would allow inflation to move over its 2 percent target. This news gave stock market investors the incentive to buy and keep buying since it meant the Fed would continue to gradually raise rates this year and next.

As long as the Fed doesn’t shock the market by being too aggressive with its rate hikes, stocks should continue to move higher. Stock appreciation sends a signal that investors believe the economy will be able to handle the Fed rate hikes with little or no disruption to growth.

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The Pursuit of $1 Trillion in Market Value

Taking a lighter look at the markets, for the first time in history, investors are waiting for a publically traded company to achieve a market value of $1 trillion. This event has investors closely monitoring the market values of the FANG stocks – Facebook, Amazon, Netflix and Google (Alphabet).

Traders are debating which tech giant gets there first? How soon? And perhaps, what will happen once it gets there. The current surge in the NASDAQ Composite to a record high suggests the race to $1 trillion is creating tremendous momentum in the technology index.

Here a few factoids from S&P Global:  In May, information technology stocks contributed 76.5 percent of the S&P 500 return. Apple alone contributed 21.3 percent of the S&P 500 performance in May. The FANG stocks as a group were roughly 45 percent of the S&P 500 return in May.

I can’t put my finger on it yet, but something tells me the markets are becoming a little too tech-heavy.

As for which company reaches $1 trillion first, my money is on Apple.

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