(Bloomberg) — Skeptics, cranks, disbelievers. The stock market is overrun with them. It could be one among the explanations equities keep rising.
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Rarely has the consensus been more uniformly bearish than it’s now. Investors are sitting with the bottom allocation to US stocks in almost 20 years, have kept money holdings high for the longest stretch because the dot-com crash and are embracing recession trades greater than any time since 2020. And why not? The banking system is stressed, the Federal Reserve pushed forward with one other interest-rates increase while recession warnings continued to flare in bonds.
But when everyone’s leaning a technique, big swings are apt to interrupt out in the opposite, because the consensus is strained and folks give in. Small gains can snowball when the fear is missing out on the subsequent big rally. Recently the priority has been warranted. The S&P 500 just finished the primary three months of the yr up 7%, rounding out back-to-back quarterly gains. That hasn’t happened during any bear market up to now 4 many years.
“Zero bulls on the market,” wrote Brian Garrett, a managing director at Goldman Sachs Group Inc., in a note this week citing a recent client survey showing 85% of the respondents were bearish or neutral. “A part of me wonders if the trigger finger is beginning to itch.”
The pain of being a bear was evident within the performance of most-hated stocks, which as a gaggle rose twice as much because the market on Friday, handing losses to short sellers. An index tracking them climbed for the primary time in seven quarters.
Pessimists abound, even after a rally that has added $4 trillion in equity values over nearly six months. In the newest Bank of America Corp. survey of cash managers this month, allocation to US stocks fell to an 18-year low, while their money levels held above 5% for 15 straight months, the longest run since 2002.
Amongst skilled speculators, caution also prevails. Hedge funds have slashed their positions in economically sensitive shares resembling banks, driving their cyclical exposure versus defensive stocks toward the bottom level since early 2020, in response to JPMorgan Chase & Co.’s prime brokerage unit.
At Goldman, hedge fund clients saw their net equity exposure hovering near five-year lows. Garrett noted that the group’s broad positioning has barely moved within the last 4 months.
The shortage of motion echoes a pattern amongst Wall Street forecasters. While news about banking stress has been fast and furious, estimates on where the S&P 500 will end the yr and the way much profit corporate America will earn have largely stayed the identical. A part of the inertia likely reflects confusion as to where the economy and market are heading.
The duration of equity strength is getting hard to disregard and calls into query the claim that this rally is nothing but a bear market bounce, a view shared by top-ranked strategists resembling Morgan Stanley’s Mike Wilson and JPMorgan’s Marko Kolanovic.
Of the 14 previous bear markets, only two saw the S&P 500 experience back-to-back quarterly gains, in 1981 and 1938. Put one other way, history just isn’t on the side of bears when stock momentum is as strong because it has been.
“It’s the bears who’re trapped and will fuel further gains in April,” said Tom Lee, co-founder at Fundstrat Global Advisors LLC who considers the S&P 500’s October low as the beginning of a bull cycle.
One big winner out of the banking chaos has been technology megacaps. The Nasdaq 100 climbed for a 3rd straight week, extending an advance from its December trough to 23%, as investors rotated out of monetary shares and sought safety in cash-rich firms.
While the surge across the 20% threshold fueled calls for a fresh bull cycle for the Nasdaq, it’s value noting that the tech-heavy gauge scored an analogous rebound last summer, only to resume declines and reach recent lows in December. When the web bubble burst from 2000 to 2002, investors needed to endure five episodes that saw recoveries of that size before the market ultimately found a bottom.
To Tony Roth, chief investment officer at Wilmington Trust, the present market buoyancy is built on false hopes that the Fed will lower rates of interest with the banking crisis threatening to thrust the economy right into a recession. The firm in November went underweight equities for the primary time in eight years, and Roth expects the bear run to last until inflation is under control.
“The market is largely telling you that these rate cuts later this yr are going to support higher multiples and we’re not convinced those rate cuts are going to come back,” he said. “The markets are misreading the Fed.”
In some ways, the basic picture just isn’t encouraging. Analysts have been trimming their 2023 earnings estimates since June. While the S&P 500’s price-earnings ratio is according to its own historic average, stocks look reasonably unattractive when stacked next to money yielding 5%.
When the market has every reason to fall and it hasn’t, theories are proffered as to what’s holding it up. To Matthew Reiner, an equity sales trader with JPMorgan, it boils all the way down to positioning.
“Equities are remarkably resilient. Positioning stays very light,” Reiner wrote in a note. “All of us must ask, is sentiment shifting around the sides? If that’s the case, investors need to begin making their bets. Real fast.”
–With assistance from Isabelle Lee and Melissa Karsh.
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