American investors have forgotten all about recession

As an unanticipated breeze of economic optimism sweeps across America, the impending doom of recession appears to be a waning memory for U.S. investors.

There’s a robust shift in the stock rally that had previously circled around a select group of colossal tech and growth companies. Now, the field seems to be expanding, further encouraging portfolio diversification.

Wave of change in investment patterns

For a significant stretch, investors have hoarded shares from a group of mammoth corporations considered safe in times of uncertainty. Consequently, these investments drove the S&P 500 to surge by approximately 12% since the start of the year.

But as America’s economy demonstrates resilience in the face of rising interest rates, the cloud of recession fears is gradually lifting.

This improved outlook has prompted a fresh wave of investments in economic sectors previously overlooked, such as small caps, energy, and industrial stocks. June’s calendar reflects a robust rally in these sectors.

Tim Murray, a capital market strategist at T Rowe Price’s multi-asset division, shares this newfound optimism. He noted that investors are progressively shifting from the pessimism that marked the year’s beginning to a much more confident market climate.

This renewed confidence is reflected in Murray’s increased allocation to small-cap stocks, which are typically the most immediate beneficiaries of economic growth.

From niche focus to broad horizons

The shift is not just anecdotal. Figures from this month show an impressive upsurge in market sectors that had been underperforming.

The S&P 500 energy sector and industrials have seen gains of 6% and 5.7% respectively this month, reflecting this newfound optimism in the American economy.

In contrast, the tech-centric Nasdaq 100 saw only a modest 2% gain this month, following its earlier significant 33% year-to-date surge.

Such expansion in the equity rally is a welcome development for many investors who had expressed concern over the market’s previously narrow focus.

The S&P 500’s gains this year have been primarily driven by just seven titans of the tech industry: Apple, Microsoft, Alphabet, Amazon.com, Nvidia, Meta Platforms, and Tesla. Yet, recent trends indicate a reversal in this pattern, opening up a broader array of investment opportunities.

Nearly all sectors of the S&P 500 are showing positive trends for this month, in contrast to only half for the year. The rising number of S&P 500 stocks trading above their 200-day moving average, from a low of 38% in March to 54% now, further corroborates this shift.

The tale of the economic indicators

Driving this shift in investor sentiment are positive economic indicators, such as stronger than expected jobs growth and robust consumer spending.

Major financial firms such as Goldman Sachs have revised their recession forecasts, suggesting a milder recession that’s expected to hit sometime in 2024 instead of late 2023.

However, it’s not all sunshine and roses. Some economic analysts warn that this optimism might be premature, pointing to recent jobless claims data that came in higher than expected.

But that doesn’t dampen the optimism for many, like Max Wasserman, senior portfolio manager at Miramar Capital. Wasserman has been bolstering his positions in underperforming consumer stocks, anticipating a turnaround as growth stabilizes in the latter half of the year.

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