Get 40% Off
🤯 This Tech Portfolio is up 29% YTD! Join Now to Get April’s Top PicksGet The Picks – Just 99 USD

Wall Street frets as 'unloved' stock rally powers on

Published 27/05/2020, 19:43
Updated 27/05/2020, 19:45
© Reuters. FILE PHOTO: A man wears a protective mask as he walks on Wall Street during the coronavirus outbreak in New York

© Reuters. FILE PHOTO: A man wears a protective mask as he walks on Wall Street during the coronavirus outbreak in New York

By Noel Randewich and Saqib Iqbal Ahmed

(Reuters) - The love-hate relationship many investors had with U.S. stocks during the more-than-decade-long bull market is reemerging, as equities steadily climb in the face of economic devastation and uncertainty over the coronavirus pandemic.

While the benchmark S&P 500 index has surged 34% from its March lows and the Nasdaq Composite is just 6% short of record highs, investors are more bearish than they have been in years and key measures such as unemployment and gross domestic product are giving their worst readings since the Great Depression.

The dichotomy between market performance and investor sentiment echoes the "There Is No Alternative" argument that dominated investor thinking in the recent pre-Covid era, when ultra-low rates around the world and the U.S. economy’s relative outperformance pushed global investors into U.S. stocks, even as they fretted about historically high valuations and weak earnings.

That dynamic is even more prevalent these days, as the Fed has pledged to keep rates at historic lows for the foreseeable future, blasting the economy with trillions in stimulus and purchasing an unprecedented range of assets in a bid to support markets and buoy investor confidence.

"Right now, there is just too much stimulus still being implemented, and the promise of more. That is making a lot of the institutional investors hesitate to short the market, even though they are skeptical that it can still run higher," said Edward Moya, senior market analyst at OANDA.

Sixty-eight percent of fund managers believe Wall Street's recent rally is a temporary bounce within a broader downturn, according to a recent survey by Bank of America (NYSE:BAC) Global Research. Cash levels among institutional investors stand at 5.7%, compared to a 10-year average of 4.7%, the survey showed.

"With fundamentals continuing to look weak ... the risk is getting forced into chasing a reflexive bubble in a late-stage bear-market rally," analysts at the bank wrote.

They recommended taking advantage of potential upside on beaten-down stocks by using options rather than owning the underlying equities.

Non-professional investors are also wary. While retail brokerages have seen a recent spike in new accounts, TD Ameritrade's Investor Movement Index, which tracks the sentiment of its customers based on their trades, in April touched an eight-year low.

Graphic: S&P 500 & investor sentiment https://fingfx.thomsonreuters.com/gfx/mkt/bdwvkddaqpm/IMX.jpg

To be sure, many view pessimistic times as just the right moment to invest. Worries over the market's health were a frequent feature during an 11-year run in stocks that saw the S&P gain 400%.

Some investors, however, have continued to buy assets traditionally seen as counterweights to stocks, even as markets have moved higher in recent weeks.

U.S. domestic equity mutual funds reported net outflows of $2.9 billion in the week to May 20, while investors added nearly $8 billion to taxable bond funds, according to Lipper. Prices for gold have moved higher as markets rallied, while the Japanese yen, another frequent haven, has strengthened 1.6% against the dollar since May 6.

“The rally is unloved,” analysts at Goldman Sachs (NYSE:GS) said in a note to clients earlier this month. Investors have “expressed varying degrees of concern about how swiftly the market rebounded from its low, the current level of valuation, and the forward return potential.”

At the same time, many have opted to bet on Wall Street's largest companies while all but ignoring other sectors, fueling worries over a swift price reversal if risk appetite fades.

Amazon (O:AMZN), Microsoft (O:MSFT), Facebook (O:FB), Alibaba (N:BABA) and Alphabet (O:GOOGL) were the most popular hedge fund picks for the seventh consecutive quarter in the March quarter, according to Goldman Sachs.

The largest companies have accounted for much of Wall Street's overall recovery since March. While the S&P 500 is now down just 12% from its Feb high, the index's median component is down 16%, and about a fifth of S&P 500 stocks are off 30% or more.

Graphic: Wall St's largest companies expand dominance of the S&P 500 https://fingfx.thomsonreuters.com/gfx/mkt/yxmpjkklxvr/Big%20Tech%20in%20SPX.jpg

Still, some investors remain sanguine regarding their colleague's bearishness. Dan Morgan, a portfolio manager at Synovus Trust, recently bought shares of Nvidia (O:NVDA), which has seen strong demand for its data-center chips as people staying home use more cloud-computing services.

© Reuters. FILE PHOTO: A man wears a protective mask as he walks on Wall Street during the coronavirus outbreak in New York

"I'm actually bullish, because I believe we will get an economic recovery in the second half and going into 2021," Morgan said. "The fact that everyone else is bearish makes me feel better."

Latest comments

just when you stop believing yourself....then you put some money in....then.....it will fall
Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.