Retail investors are buying the most stocks since March 2022

Investors are entering a critical week, anticipating key events such as the release of November's consumer price index (CPI) on Tuesday and the Federal Reserve's interest-rate decision on Wednesday. Speculation about the Fed concluding rate hikes and potentially implementing cuts by mid-2024 has led to a significant drop in Treasury yields, triggering a surge in investor risk appetite.

The S&P 500 has gained around $4 trillion in market value since late October, with investors favoring areas like small caps amid falling borrowing costs. Despite the overall optimism, concerns arise as a measure of expected volatility in the S&P 500 for the next five trading sessions shows a notable increase relative to the subsequent five days. The gap suggests a rising demand for hedging against potential turbulence. Tuesday's CPI release is expected to influence market sentiment, with signs of receding inflation potentially boosting shares.

The consumer prices are anticipated to have risen at a 3.1% annual pace, the lowest since June. The Federal Reserve's policy decision on Wednesday will be closely watched, with a projection for steady policy and potential indications of future rate moves. The market is vigilant for any signals from Chair Jerome Powell that may impact expectations.

The risk lies in a robust economy maintaining high inflation, potentially leading to additional rate hikes and affecting rate-sensitive tech stocks. The S&P 500, up almost 20% this year, has seen gains since October, aligning with the decline in 10-year Treasury yields. The recent drop in bond yields is seen as favorable for stocks, historically leading to positive returns for the S&P 500 and the Russell 2000. Retail investors have shown increased enthusiasm, with substantial inflows into US stocks. Active managers, aiming to compensate for missing out on this year's rally, contribute to additional momentum in the stock market. Despite the overall positive outlook, uncertainties persist, and investors remain attentive to potential shifts in market dynamics based on upcoming events and Federal Reserve communications.