The love-hate relationship many investors had with U.S. stocks during the more-than-decade-long bull market is re-emerging, 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 per cent from its March lows and the Nasdaq Composite is just 6 per cent 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 Global Research. Cash levels among institutional investors stand at 5.7 per cent, compared to a 10-year average of 4.7 per cent, 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.
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 per cent.
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 US$2.9-billion in the week to May 20, while investors added nearly US$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 per cent against the dollar since May 6.
“The rally is unloved,” analysts at Goldman Sachs 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, fuelling worries over a swift price reversal if risk appetite fades.
Amazon, Microsoft, Facebook, Alibaba and Alphabet 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 per cent from its Feb high, the index’s median component is down 16 per cent, and about a fifth of S&P 500 stocks are off 30 per cent or more.
Still, some investors remain sanguine regarding their colleague’s bearishness. Dan Morgan, a portfolio manager at Synovus Trust, recently bought shares of Nvidia, which has seen strong demand for its data-centre chips as people staying home use more cloud-computing services.
“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.”
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