It is widely believed that in March-April 2020, retail investors actively bought stock market declines while institutional investors sold. The market's rapid reversal to growth has formed a reflex for retail investors to buy stocks on downturns.
However, we note a significant change in market fundamentals.
With the onset of the pandemic, central banks were on the side of retail investors, dramatically easing monetary conditions, and governments handed out money and benefits but prohibited going out and spending money.
It is correct to say that investors then did not fight institutions but followed a “don't fight the Central Bank” strategy. With the unprecedented injections into the financial system, the pendulum of the markets swung in the upward direction.
But in recent weeks, the Fed, having received a surprise in the form of strong employment and rising wages and yesterday with accelerating inflation, must now move to the side of equity and bond sellers.
Short-term traders should keep a close eye on how monetary policy expectations change.
A month ago, the assumptions of 7 Fed rate hikes in 2022 or a 50-point step in March looked marginal. On Thursday, the latter option was almost entirely in the price of rate futures. There is talk of a possible start of active selling from the Fed's balance sheet, and there is also talk of an extraordinary rate hike, possibly even today.
Markets can hardly sustain this pace of tightening expectations for long. But while this is happening, it won't be a wise strategy to bet against the dollar and for the stock market.
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