Investors Buckle Up: Aggressive Stock and ETF Buying in Volatile Fed Week

In a week marked by volatility following the Federal Reserve's hawkish pivot, investors demonstrated remarkable resilience and optimism, aggressively buying stocks and ETFs. According to Bank of America, inflows reached a staggering $10 billion, the largest since January 2017 and the second-largest since 2008. This surge in buying activity, despite the S&P 500 Equal Weighted Index (EWI) dropping over 7% and the SPDR S&P Bank ETF (KBE) needing to hold near 2022 highs to prevent investor sentiment from souring, indicates a shift in investor sentiment and a bullish outlook on the market's ability to weather the Fed's policy changes.

The Fed's hawkish stance, signaling fewer interest-rate cuts than anticipated next year, initially caused risk appetite to "suddenly twitchy," as noted by Bank of America Corp. strategist Michael Hartnett. However, investors soon turned bullish, allocating more funds to U.S. equities and reducing cash holdings. This aggressive buying, driven by optimism in the face of volatility, suggests that investors are confident in the market's ability to continue growing.



During this volatile week, investors directed their largest inflows towards individual stocks, with large-cap stocks seeing the bulk of the buying activity. Six out of the 11 sectors attracted inflows, led by Technology, Communication Services, and Industrials. Tech and Communication Services sectors have recorded steady inflows over the past seven and eight weeks, respectively, while Industrials saw their largest inflow since February 2022. Consumer Staples also drew significant interest, posting the highest inflows since April.



The S&P 500 EWI and the KBE played significant roles in shaping investor sentiment during this period. The EWI, which allocates equal weight to all S&P 500 components, dropped over 7% since a late November record, while the broader S&P 500 fell less than 3%. This divergence suggests that a relatively small cohort of top-performing stocks masked an ongoing correction beneath the surface, indicating a lack of breadth in the market rally. Meanwhile, the KBE, tracking U.S. banking stocks, needed to hold near 2022 highs to prevent investor sentiment from souring ahead of President-elect Trump's inauguration. The KBE's performance reflects the banking sector's sensitivity to interest rate changes and economic uncertainty, further influencing investor sentiment during the Fed's hawkish pivot.

In conclusion, the aggressive buying of stocks and ETFs during the volatile Fed week demonstrates investors' resilience and optimism in the face of uncertainty. Despite the market's volatility and the Fed's hawkish stance, investors remain bullish on the market's ability to continue growing. The inflows into specific sectors and the performance of key ETFs highlight the market's potential for long-term growth and the importance of staying informed and adaptable in the ever-changing investment landscape.