U.S. stocks are reaching new highs, bitcoin is soaring, and investors are forgoing insurance against portfolio declines as optimism about the economy’s trajectory fuels a growing appetite for risk.

Dubbed the “Goldilocks trade,” this strategy hinges on the Federal Reserve’s ability to manage inflation without stifling growth. Recent economic data, such as the April report showing a greater-than-expected U.S. consumer price slowdown, has bolstered this outlook, shifting investor sentiment towards a more risk-on approach.

Market Performance and Investor Sentiment

Across asset classes, the renewed enthusiasm for risk is evident. The S&P 500 hit a new record high, climbing 11% year-to-date as it rebounds from a dip last month. Similarly, the Nasdaq Composite Index and the Dow Jones Industrial Average are reaching new peaks.

High-risk assets like bitcoin and meme stocks have also surged despite their debated ties to economic fundamentals. Bitcoin, in particular, reached a three-week high of $66,261, nearing its record of $73,803 set in March.

A survey by BofA Global Research highlighted this growing confidence, showing investor sentiment at its most bullish since November 2021, based on metrics like cash levels, equity allocations, and economic growth expectations.

Reduced Demand for Downside Protection

Reflecting this optimism, the Cboe Volatility Index (VIX), which measures demand for protection against market swings, closed at a four-month low. The VVIX index, indicating expectations for VIX movements, is also near its lowest level in a decade. This suggests investors are less concerned about potential market declines.

Instead, there is a high demand for call options that benefit from further stock market gains. Data from Trade Alert shows that the average daily trading volume of call options outnumbers puts 1.2-to-1, the most bullish this measure has been in about a month.

The Rally in Meme Stocks

The resurgence of meme stocks further illustrates the robust risk appetite. GameStop shares soared 140% last week, driven by posts on social media platform X from an account linked to Keith Gill, a key figure in the previous meme stock frenzy. Other heavily shorted stocks like AMC and Koss have also seen significant gains.

Impact on the Dollar and Emerging Markets

Expectations of potential Federal Reserve rate cuts later this year have pressured the dollar, which has dipped 2% against a basket of currencies since mid-April. This decline has boosted emerging market currencies, with the Polish zloty up 3.7%, the South African rand up 2.8%, and the Colombian peso advancing 2.7% this month.

Bond Market Movements

Volatility expectations in the bond market have decreased, with U.S. Treasury yields falling to more than five-week lows. This inverse relationship between bond prices and yields indicates a calmer market environment.

This content represents the views of Friends Wealth Management and is intended for informational purposes only.