S&P 500 breaks key resistance – more upside coming?

All three major US indices traded sharply higher on Wednesday as sentiment improved notably, leading investors back into riskier assets, such as stocks.

First Citizens Banc Shares’ acquisition of Silicon Valley Bank‘s assets during the weekend alleviated concerns about the banking sector. Today, bank regulators will testify before Congress to discuss this failure and that of Signature Bank as members of Congress examine their regulation.

Fed is more hawkish than investors

The market’s perspective on the trajectory of interest rates shifted as a result of the turbulence in the banking industry. As a result, futures traders are currently divided over whether the Federal Reserve would raise rates by another quarter-point at its May meeting or maintain current rates.

According to the Fed’s economic projections, the benchmark rate would peak at 5.1% this year, leaving space for another rate increase from the current target range of 4.75 to 5%.

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As of the end of the first quarter on Friday, the Nasdaq is up close to 12%, the S&P 500 is up more than 3%, and the Dow is underperforming with a decline of 2.2%. This is a turnaround from last year when the Nasdaq sank almost 30%, the S&P 500 lost over 18%, and the Dow fell a relatively modest 9%.

Tough times ahead

The global economy’s future seems bleak as global recession risks increase and world trade fragments. In recent research, Indermit Gill, the World Bank’s Chief Economist and Senior Vice President for Development Economics warned that the global economy might be on the verge of a lost decade.

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According to the analysis, almost all economic drivers that drove growth and prosperity over the past three decades are waning. Hence, between 2022 and 2030, the average worldwide potential GDP growth rate is projected to fall by about a third, to 2.2% per year, compared to the pace that prevailed in the first decade of this century.

For developing economies, the rate of fall will be exactly equivalent: from 6% per year between 2000 and 2010 to 4% per year for the duration of this decade. These decreases would be even more severe in the case of a worldwide financial crisis or a recession.

The World Bank warned global central banks earlier this year to remain vigilant on the economic risks associated with aggressive monetary policy tightening intended to combat inflation since these risks may have widespread repercussions. The onset of a regional bank crisis in the United States and difficulties with Credit Suisse in Europe proved the accuracy of these fears during the past few weeks.

The World Bank’s research concluded, “It will need a herculean collective policy effort to return growth to the average of the preceding decade.”

Technically speaking, the index is breaking above the significant short-term downtrend line, likely starting another meaningful leg higher, targeting $4,080, or possibly the February peak at around $4,200.