3 Ways Investors Are Showing They're Bullish on the Stock Market
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Do you remember that feeling when your parents told you about a big upcoming vacation? The mounting excitement from anticipation keeping you awake at night?
That's how the market has been feeling since it learned that the Federal Reserve is going to cut interest rates at some point in 2024. However, almost four months have gone by since the central bank hinted it would start lowering its benchmark rate, and no definitive dates have been announced.
That’s not stifling investors' optimism, though, as lukewarm speculation surrounded the Fed's policy meeting this week despite Chair Jerome Powell's caginess about the Fed's rate cut timeline this year. And with inflation reduction stalling out and the economy booming so far in 2024, this meeting resulted in interest rates remaining steady and failed to provide any clarity on exactly when rate cuts will happen.
Despite the uncertainty, investors seem to expect the stock market to continue rallying for the foreseeable future, with their bullishness evident through a series of market trends.
3 signs of optimism in the stock market
The Fed was praised in 2023 for its rate hike cycle, which proved exceptionally effective at taming runaway inflation. That year alone, those hikes were able to bring inflation down by a stunning three percentage points. But hesitation to cut rates has grown in the last few months, with inflation largely stagnant and lingering well above the Fed’s target rate of 2%.
Expectations coming into this year included as many as three rate cuts, but that plan was never set in stone and it continues to be complicated by sticky inflation. Additionally complicating the situation is that slashing rates too soon could allow inflation to ramp back up, but keeping rates higher could result in a hard landing and subsequent recession. The March meeting showed how delicate the Fed's balancing act is, and with the next meeting not coming until April 30–May 1, there won't be any immediate policy changes.
This shouldn't be a surprise, though, given how inflation data — as measured by the Consumer Price Index — has developed, but investors are seemingly playing the market like its 2024 rally is sure to continue. Here’s how we know investors are optimistic, which is simultaneously a crib sheet for ways to invest if you are optimistic, too.
1. Investors are putting more money into equity funds
Equity funds are mutual funds invested in stocks. They are a common way for investors to gain exposure to multiple stocks without having to worry about managing all of the individual investments themselves. Some funds are actively managed, with portfolio managers constantly evaluating holdings and adjusting them based on performance. Others are passively managed, like index funds, with holdings only adjusted to mirror changes in an underlying benchmark.
In the last month, the amount of money investors injecting into equity funds continued to rise. In mid-March, equity funds saw a single-week inflow increase of almost $5 billion, the third consecutive week of more money funneling into those funds than the amount coming out of them.
This influx of money into equity comes while index funds saw spectacular growth to begin the year. The S&P 500, for example, broke its all-time high multiple times throughout early 2024, as did other indices like the Dow Jones Industrial Average and the Nasdaq. Those records, combined with slowing inflation reduction, might lead one to believe investors would be taking profits, but they are instead doubling down.
2. Options traders load up on calls, but not puts
Options trading doesn't involve buying a stock and selling it later; instead, it's a contract between a buyer and seller based on the underlying stock’s price. There are two kinds of options: calls and puts. A call option gives the investor the right to buy a stock at a predetermined "strike" price once the stock reaches that price, while a put option gives the buyer the right to sell a stock at a predetermined strike when the stock reaches that price.
Put options are a common way for investors to hedge against volatility; if an investor owns a stock, they can buy put options that allow them to sell at a guaranteed price, adding peace of mind to a portfolio. In essence, put options are bearish bets that allow traders to make money on the falling price of the underlying security. On the other hand, call options are bullish bets that allow traders to make money on the rising prices of an underlying security.
Experts can use something called “skew” to measure investor sentiment with options trading. During times of market rallies like this year’s, experts would predict a higher negative skew, which means that investors are buying more put options in anticipation of price drops stemming from a broad market pullback. However, what they are finding instead is “flat skew,” which means investors are buying fewer put options to hedge their bets. Effectively, the data suggests that fewer investors predict a market pullback any time soon.
3. IPO hype is sticking around
Investing in an initial public offering, or IPO, isn’t something you’d do during a time of market tumult. While IPOs offer the chance to invest in a company at the ground floor, stocks that are new to the market see a lot of growing pains and volatility as investors sell the news and shares get priced in. Moreover, research shows that IPO stocks are often unprofitable down the line.
So, with the worry around the Fed putting off rate cuts and sending the market downward, you’d imagine that social media company Reddit’s IPO this week wouldn’t be as sought after as it appears to be. But, the numbers say differently; Reddit’s IPO is five times oversubscribed.
What does that mean? While any investor can buy a stock as soon as it hits the market for public trading, actually getting in on IPO shares at the determined asking price requires the individual investor to apply, or subscribe, to invest in the company ahead of time.
Ahead of Reddit’s listing, there are five times more subscribers than there are shares available to purchase. What this shows is that not only are investors comfortable investing in an IPO, but they are also willing to invest in a social media company that has for most of its existence been unprofitable — not behaviors typically associated with potential market volatility on the horizon.
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