10 months ago • 1 min
The S&P 500 is up 8% this year, but this solid start tells a very different story than the one that the big economic indicators are telling. Despite strong consumer spending, US economic growth slowed sharply to just 1.1% in the first quarter of 2023, down from 2.6% the year before. It shows that all those interest rate hikes are indeed taking a toll on the economy, even if the stock market seems unruffled.
That’s partly because of algo traders: the busy systemic market players rely primarily on price trends and rules-based data-driven algorithms to buy and sell stocks. They’ve loaded up on $170 billion worth of stocks in the past month alone, more than they’ve bought since early 2022. But Goldman Sachs says this is unlikely to continue, and downside risks heavily outweigh upside risks. See, if the market sells off in the next month, these quant funds could be forced to unwind as much as $276 billion of shares. But if the market rallies, they’ll only buy $25 billion more.
If you’re investing for the long-term, it’s wise not to worry about short-term market fluctuations. But it’s also sensible to know the factors that can drive wild short-term fluctuations in the first place, so you don’t panic when the market registers a steep fall for seemingly no good reason.
Algo traders aren’t the only force driving the markets, but they are a big one, and they’re becoming an increasingly sizable force as AI gets put to work.
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