Analysis – ‘Mysterious’ US stock rally defies economic unease

Traders work on the floor of the NYSE in New York
FILE PHOTO: Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, U.S. March 29, 2022. REUTERS/Brendan McDermid

March 30, 2022

By Lewis Krauskopf

NEW YORK (Reuters) – As a stunning recovery in US stocks continues, investors are wondering how long the rise can last amid a tightening Federal Reserve, bond market warnings of recession and geopolitical uncertainty.

The S&P 500 is up 11% since March 8, its biggest 15-day percentage gain since June 2020, led by many of the high-growth stocks that were under pressure for much of the year. The benchmark index pared its year-to-date losses to 2.8% after previously contracting as much as 12.5%.

The move came despite a host of concerns that rocked stocks earlier this quarter, including the war in Ukraine, rising inflation and a sharp rise in Treasury yields fueled by the Fed’s tightening policy.

Stocks shrugged off the latest ominous sign from the bond market on Tuesday. The S&P 500 closed up 1.2% even as the widely used 2-year/10-year US Treasury yield curve inverted for the first time since September 2019, a phenomenon that has reliably predicted previous recessions.

“It was puzzling,” said Jack Ablin, chief investment officer at Cresset Capital Management. “I think the bond market is sober and the stock market is unworldly.”

Investors are pointing to a number of factors that could drive the stock rally.

Many have been encouraged by Fed Chair Jerome Powell’s assessment that the US economy is strong enough to handle an aggressive pace of rate hikes and may be cheering a Fed that now appears to be tackling sky-high inflation head-on, analysts said.

The S&P 500 is up over 6% since the Fed’s March 16 policy meeting, which saw rates hike 25 basis points and tightening 150 basis points for the remainder of the year.

“While equity investors love low interest rates, they don’t like an inflationary environment that spirals out of control,” said J. Bryant Evans, investment advisor and portfolio manager at Cozad Asset Management.

Institutional investors have also been buoying prices in recent weeks as they unwound so-called “short” bets on stocks, analysts at Goldman Sachs said in a recent report.

At the same time, individual investors used the share weakness as a buying opportunity, the bank said.

According to Goldman, $93 billion of capital has flowed into U.S. equity funds year-to-date, “suggesting that households have continued to buy after a record year for U.S. equity inflows in 2021.”

In fact, many of the biggest winners of the stock rally came to retail investor favorites, which had rallied earlier this year as bond yields soared. These include so-called meme stock darlings GameStop and AMC Entertainment Holdings, which have more than doubled from their 2022 lows, and Cathie Wood’s ARK Innovation Fund ETF, which is up 36.5% from its recent low.

Yardeni Research strategist Ed Yardeni said March 8 may have marked a bottom for the stock market this year as he believes stocks are finding support from investors who are using stocks as a hedge against inflation, which peaked has been standing for almost four decades.

“The fog of war had obscured the outlook, but the long-term bull market, punctuated by panic attacks, remains intact,” he wrote on Tuesday.

Corporate earnings prospects also remain solid, even as higher energy and other prices threaten to squeeze profit margins. Estimates for S&P 500 earnings have risen year-to-date, with companies forecasting an 8.8% earnings increase in 2022 overall, according to Refinitiv IBES.

“Shares plummeted, but earnings estimates continued to climb,” said Matthew Miskin, co-chief investment strategist at John Hancock Investment Management. “Investors are hesitant to really divest from stocks here as the earnings and economic picture still looks very benign.”

Another factor could be investors adjusting their portfolios over the quarter, strategists at JPMorgan said. Investors’ portfolio rebalancing “likely played a major role over the past two weeks, hurting bonds and supporting stocks,” they wrote.

Many investors are wary of the recovery. Neuberger Berman said Monday it wants to “fade out” stock rallies.

“High inflation, rising interest rates and slowing growth present a potentially toxic mix for equity investors,” said Erik Knutzen, Neuberger’s chief investment officer, multi-asset class, in a written comment.

Robert Pavlik, senior portfolio manager at Dakota Wealth Management, said he’s holding slightly more cash than normal in client portfolios.

“I worry that this is a bear market rally that could reverse and that we could retest the lows,” Pavlik said.

(Reporting by Lewis Krauskopf; Editing by Ira Iosebashvili and Richard Pullin) Analysis – ‘Mysterious’ US stock rally defies economic unease


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