Animal Spirits
U.S. markets are roaring to new records as the economy flashes warning signs. But even in an era of gut-led investing, real forces are driving this rally. Understanding them is key to navigating a potentially tricky second act.
The Nasdaq notched another record on Friday. The S&P 500 extended its winning streak. And the Dow broke a three-week slump. IPO fever is back too – last week was the busiest for U.S. listings since 2021, with Klarna ($KLAR) and Gemini ($GEMI) seeing massive day-one volume.
And then there was Oracle’s ($ORCL) massive 42% intraday rally – its best day since 1992. A US$300B deal with OpenAI and a 359% YoY cloud business backlog-boost worth US$455B can have that effect.
It briefly made Oracle CEO Larry Ellison the world’s richest man, overtaking Tesla ($TSLA) CEO Elon Musk, who took centre stage again this week after buying US$1B worth of Tesla stock. Investors are also considering a proposal to pay him over a trillion dollars.
That kind of headline-dominating thing drowns out these (arguably, more important) ones: Stagflation might be back and consumer sentiment is getting worse.
So the market isn’t rising because of the economy, but in spite of it? Welcome back animal spirits. Coined by economist John Maynard Keynes, it explains this very situation: optimism that drives investors to chase momentum and keep buying in the face of bad news.
Nvidia ($NVDA) posted some of the year’s strongest trading volumes. So did Broadcom ($AVGO) and Alphabet ($GOOGL). What’s more, they delivered quarterly report cards to support the price action.
The rally might seem irrational, but it’s not baseless. Markets are still very liquid. Big tech optimism is backed by real earnings. Add in a central bank that hasn’t closed the door on cuts and you’ve got a scenario that’s far from doom and gloom.
Still, weak U.S. payroll data and a slowing GDP has some investors on edge – leading to plenty of hedge. So it's no surprise that the classic safe haven that is gold has been having a year. The SPDR Gold Trust ($GLD) – one of the largest physically backed gold ETFs – is up 38% YTD.
Of course, those that still want to stay invested in equities while being protected from downside risks have options too. Enter the covered call ETF: a fund that holds stocks and sells call options on them, collecting premiums that provide extra income.
The JPMorgan Nasdaq Equity Premium Income ETF ($JEPI) follows this strategy. It invests in low-volatility U.S. stocks and pays a 12-month rolling dividend yield of 8.13%. Investors won’t be bragging about $JEPI’s returns, but they’ll still be grateful for the quarterly cheque.
After all, building resilience in your portfolio doesn’t mean abandoning the rally. Animal spirits might fuel it… but a little discipline can keep you from getting trampled.
This is not financial advice nor a recommendation to invest in the securities listed. The information presented is intended to be of a factual nature only. Past performance is not a reliable indicator of future performance. As always, do your own research and consider seeking financial, legal and taxation advice before investing.
