The Stock Market Is Ignoring The Economy (#GotBitcoin?)
The Dow enjoyed its best two-week stretch in more than 80 years, but the economy is still struggling. The Stock Market Is Ignoring the Economy (#GotBitcoin?)
The Dow Jones Industrial Average staged its best two-week performance since the 1930s, a dramatic rebound that has left many investors with a confounding reality: soaring share prices and a floundering economy.
The explosive rally is a sign that many are positioning for the U.S. to make a speedy recovery when the coronavirus crisis eases. Investors have been encouraged in recent days by signs that several states will move to resume business, along with hopes that a viable treatment for Covid-19 could be near.
The blue-chip index rose 2.2% this week, extending its rally over the past two weeks to 15%—its best performance since 1938. The S&P 500 climbed 3% this week, while the Nasdaq Composite surged 6.1% as investors piled into highflying technology stocks. The Dow and S&P 500 are still down more than 10% for the year, while the Nasdaq’s losses have been cut to 3.6%
Many investors agree the most important driver of the rebound has been the Federal Reserve’s massive stimulus plan, combined with the efforts of the U.S. government, which sent a signal that both were willing to step in like never before to buoy the economy. U.S. stocks bottomed March 23, after the Fed cut rates to near-zero.
“They took away the depression. That scenario is out of the picture now,” said Zhiwei Ren, a portfolio manager at Penn Mutual Asset Management. “The Fed is the fundamental reason” for the rebound.
The central bank also unleashed a massive program to buy Treasurys and mortgage-backed securities, while President Trump signed a roughly $2 trillion stimulus package, the biggest relief package in U.S. history.
For some investors, it doesn’t pay to bet against stocks after the Fed stepped in. The stimulus spurred a fear of missing out among investors and gave many the confidence to resurrect some of the most popular tactics of recent years—buying dips in the stock market and piling into shares of big technology companies.
The coronavirus’ toll on the population and the economy has been dour. More than 150,000 people around the globe have died, while cases world-wide have topped 2 million. In the U.S., more than 22 million Americans have sought unemployment benefits in recent weeks.
Retail sales, a measure of purchases at stores, gasoline stations, restaurants, bars and online, fell by a seasonally adjusted 8.7% in March from a month earlier, the most severe decline since record-keeping began in 1992. Earnings for the first quarter among big U.S. companies are expected to decline nearly 15% from a year earlier, according to FactSet, which would mark the biggest decline since 2009.
Still, as the data has darkened, investors have been buying stocks, extending the Dow’s rally from its March low to 30%. It is a sharp about-face from March, the most volatile month in the stock market’s history, when the 11-year bull market in equities abruptly ended.
“While it’s great to be in the green, we do wonder, what is it that the markets are celebrating,” said Amy Kong, chief investment officer at Barrett Asset Management. “Nobody knows how long this is going to last,” she said of the pandemic.
Many analysts are now betting on a so-called V-shaped recovery—a sharp slowdown and then a quick economic recovery. Goldman Sachs Group Inc. economists expect the economy to significantly contract in the first and second quarters before rebounding later in the year.
Analysts are also looking past this year’s abysmal earnings expectations and forecasting profit growth in the first and second quarters of next year, FactSet data show. Corporate earnings are projected to plunge by 27% in the second quarter of 2020, before rebounding.
Marko Kolanovic, JPMorgan Chase & Co’s global head of quantitative and derivatives strategy, has been analyzing reams of data on the spread of the pandemic around the globe, looking at hospitalization rates and resources like hospital beds for clients. He expects U.S. stocks to be back at highs in the first half of next year. Why? Going against the Federal Reserve is typically a losing battle, he said.
The Fed’s latest move “reinforces our view of a full asset price recovery, and equity markets reaching all-time highs next year,” Mr. Kolanovic said in a recent note. “Investors with [a] focus on negative upcoming earnings and economic developments are effectively ‘fighting the Fed,’ which was historically a losing proposition.”
There may be limits to that approach, other analysts said. For example, a $350 billion small-business loan program from the U.S. government has already exhausted its funding, highlighting the mammoth challenge that lawmakers face—and sheer amount of cash necessary—to support the economy and keep Americans employed.
These types of loans can be forgiven if firms don’t lay off workers, but U.S. lawmakers have recently struggled to agree on the next round of coronavirus emergency aid.
Despite the stimulus checks going to Americans around the country, measures by the central bank and government can’t alter human behavior and force people to leave their homes, eat at restaurants, shop at malls and go to movies. That has led some analysts to say a recovery may take longer than many are currently anticipating.
“How long before you and I are going to feel comfortable going to a concert again?” said Dominic Nolan, a senior managing director at Pacific Asset Management, which oversees roughly $12 billion in debt. “A government program doesn’t really help that.”
Mr. Nolan said that he has recently bought bonds of investment-grade companies after the Federal Reserve’s recent moves.
Some investors are still anxious because the bond market is sending a more cautious signal. Investors have continued scooping up traditionally safe assets like government bonds and gold as stocks have rallied. The yield on the 10-year Treasury note has fallen to 0.655% from 1.26% in mid-March as bond prices have risen, while gold prices hit their highest level in more than seven years this week. The concurrent gains across traditionally risky and safe assets alike suggest that many remain concerned about an extended downturn.
Investors have also treated some corners of the stock market as a hiding place, piling into the technology darlings that powered markets higher in recent years.
“The Nasdaq is trading like a safe haven in a way,” Mr. Ren of Penn Mutual Asset Management said.
Amazon.com Inc. and Netflix Inc. both surged at least 14% this week and set records, while some of the momentum-driven trades that were popular earlier in the year also re-emerged. Tesla Inc. has risen for 10 consecutive trading days, its longest winning streak on record, bringing its gain for the year to 80%.
It seems like a “hold your nose, close your eyes and buy,” situation, said Mike Bailey, director of Research at FBB Capital Partners. “Even though there’s a torrent of economic data coming.”
Mr. Bailey said he has been surprised by the “stocks going up on bad news” phenomenon. However, he has bought shares of Amazon and Apple Inc.
The recent rally among big tech stocks underscores their hefty influence on the market. The S&P 500, which is weighted by market-capitalization, is down 11% this year, while a version of the index that gives every company an equal weighting has plummeted 19%.
“You have the trillion dollar guys that are doing fine,” Mr. Nolan said. “I think on average companies have gotten hit really hard.”
Bets Against The Stock Market Rise To Highest Level In Years
Among the companies short sellers have targeted in recent weeks are travel-related firms.
Short sellers have revived their wagers against the stock market in recent weeks, taking their most aggressive positions in years.
Bets against the SPDR S&P 500 Trust, the biggest exchange-traded fund tracking the broad index, rose to $68.1 billion last week, the highest level in data going back to January 2016, according to financial analytics company S3 Partners. That was up from $41.7 billion at the beginning of 2020 and $41.2 billion a year ago.
Short sellers borrow shares and sell them, hoping to repurchase them at lower prices and keep the difference as profit. Among the individual companies they have targeted in recent weeks are travel-related firms, including Carnival Corp., Royal Caribbean Cruises Ltd., Marriott International Inc. and Wynn Resorts Ltd.
Those bets come during a wild year for investors who are struggling to reconcile the impact of the coronavirus pandemic on the population and economy. The S&P 500 suffered its fastest drop from a record to a bear market in history—ultimately falling 34% between Feb. 19 and March 23. Its 28% rebound since then has also been brisk, leaving some investors anxious about the strength of the rally when so much remains unknown.
“We’ve really seen a significant bounceback in the last three weeks at levels that I think are too quick,” said Jerry Braakman, chief investment officer at First American Trust. His firm recently bet against the Nasdaq-100, on the belief that technology stocks have fallen too little to reflect the probability of a recession. The index is up 1.1% in 2020.
“When we see a strong move in one direction, where we think the fundamentals and the news can turn ugly, especially during an earnings cycle, we think that’s an opportunity where we could see a 5, 10% selloff again,” he said.
Investors are bracing for the possibility of more volatility this week, as earnings reports from companies including Coca-Cola Co., Netflix Inc. and Delta Air Lines Inc. give another glimpse at how the coronavirus is reshaping the landscape for U.S. business.
The outsize market swings of late require vigilance from investors who sell shares short because they can face losses when prices rise. Short sellers incurred total mark-to-market losses of $108.8 billion over three days in late March when the S&P 500 surged 18%, according to Ihor Dusaniwsky, head of predictive analytics at S3 Partners.
But with the potential for additional declines ahead, many investors have decided that the ability to hedge their portfolios—or simply bet on a selloff—is wise.
“Things will go back to normal eventually and these positions will decrease but not until we start seeing less volatility in the market,” Mr. Dusaniwsky said of the rise in short positions against the SPDR S&P 500 Trust. “No one’s going to give up their insurance until they see the chances of catastrophe are in the rearview mirror.”
The portion of available shares sold short against the SPDR S&P 500 Trust has also risen, climbing to 27% in early April, the highest level since November 2016 and up from 14% at the beginning of 2020.
The increase in bets against the market coincides with a push in other countries to temporarily curb short selling. At times of heightened volatility, critics often argue that the practice exacerbates downward pressure on stock prices. But Jay Clayton, the chairman of the Securities and Exchange Commission, has argued short selling is needed to facilitate ordinary market trading.
To be sure, coronavirus has upended entire industries in recent weeks, leaving investors scrambling to reassess the growth prospects of companies from Marriott to Clorox Co. to Amazon.com Inc. to Carnival.
With the pandemic devastating global travel, hotel, casino and cruise stocks have been among the hardest hit—and seen some of the biggest additions to the short positions against them.
Many hotels and casinos temporarily closed their doors when demand evaporated, furloughing employees and curbing spending plans, and the Centers for Disease Control and Prevention has extended a no-sail order for cruises into July.
Short sellers have added a collective $797 million to their short positions against Carnival, Royal Caribbean, Marriott and Wynn over the past 30 days, according to data Friday from S3 Partners.
Alex Lee, a San Francisco resident who manages a family sandwich shop in Oakland, Calif., and his wife had previously dabbled in short selling but have recently devoted more attention there. They made bets against Marriott, along with other stocks.
“Because of Marriott’s price at the time, it seemed like it had more room to fall and because of its heavy presence in Europe and the United States, we just thought that that company itself would be more vulnerable to falling more,” he said.
Over two rounds of shorting Marriott stock in March and April, they made a profit of about $15,000, Mr. Lee said. Marriott recently said about 25% of its hotels are temporarily closed, and North American occupancy levels are around 10%. Its shares are down 44% this year.
Among the stocks that saw big drops in short positioning in March were stodgy consumer-staples shares, which got a bounce as Americans stocked their pantries to wait out the pandemic at home.
“We had a lifetime of trading in the month of March,” said Mitch Rubin, chief investment officer at RiverPark Funds. He said he had previously bet against shares of Kroger Co., Walmart Inc., Clorox and Campbell Soup Co. but covered those positions in late February and early March as it became clear those companies would perform well with consumers sheltering in place.
“Their business is healthier than it was before the crisis because the demand for their products has increased,” he said. “The amount of times you clean high-touch surfaces with a chemical disinfectant is going to go up for some period of time, maybe for the rest of our lives.”Go back