A rush to stocks, driven by bargains and bravery

The S&P 500 is up 23 percent from its low last month. Opportunistic buyers are seeking bargains, while short-sellers are paradoxically helping amplify the rally.

  • By Matt Phillips,
  • The New York Times News Service
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Millions more are filing for unemployment benefits every week. The consumer spending that carries the economy is at a standstill. Small businesses are scrambling for loans to stay afloat.

And somehow the stock market has been going up.

After a 3.4 percent rise on Wednesday, the S&P 500 (.SPX) has bounced 23 percent from its low in a disastrous March, despite a darkening outlook for economic growth and corporate profits.

One reason: It’s the time to buy for investors able to stomach the market’s swoons.

Cole Smead, a portfolio manager at the Smead Value Fund, has been snapping up bargains in beaten-up parts of the market, like oil and energy producers, homebuilders and shopping-mall companies, that are closely tied to short-term swings in the economy.

“We will never get these prices again,” said Mr. Smead, whose fund has $1.3 billion in assets. With even a modicum of confidence that the economy will recover, he said, it makes sense to go shopping.

As economically damaging as the pandemic will no doubt be, Wall Street is starting to see a path forward that wasn’t clear a few weeks ago. Slowing infection rates, hefty government relief packages and the Federal Reserve’s unprecedented efforts to calm the markets have helped eased investors’ minds.

Some of the buyers are opportunistic hedge fund traders and mutual fund managers, driving sharp gains for blue-chip shares that were battered by the market sell-off. Some are traders feeling pressure to get into a rising market. And some are short-sellers forced to buy to minimize their own losses.

“This is trader and professional money driving this market,” said Scott Wren, a managing director at the Wells Fargo Investment Institute.

Mom-and-pop investors have largely been sitting out — a sign that the rally doesn’t reflect widespread optimism.

“They’re still really nervous,” said Michael Yoshikami, whose firm Destination Wealth Management manages some $2.5 billion in assets for clients from its base in Walnut Creek, Calif. “There’s not a lot of conviction that this rally is the start of things being back to normal.”

The economic outlook is bleak: The United States appears to be teetering on the brink of the steepest downturn since the Great Depression. Goldman Sachs economists, for example, expect the gross domestic product to contract at an astounding 34 percent annual rate in the second quarter, with unemployment reaching roughly 15 percent.

That makes the market’s recent bounce all the more remarkable.

A month ago, stocks were in a free fall. Investors were panicking over everything they didn’t know about the outbreak: how long it would last, how the government and the Fed would react, and how far-reaching the damage would be.

Since then, the Fed has said it was ready to buy an unlimited amount of Treasury and other government-backed bonds, Congress and President Trump have enacted a $2 trillion relief package (with more almost certain to come), and officials in China have lifted travel restrictions in Wuhan, the city where the pandemic began late last year.

Even in New York State — the epicenter of the outbreak in the United States, where a single-day high of 779 deaths were recorded on Tuesday — officials have said the increase in hospitalizations has begun to slow.

“The difference between now and the start of the pandemic is that we can at least see the end,” Brad McMillan, chief investment officer for Commonwealth Financial Network, a privately held investment firm with more than $160 billion under management, wrote in a market commentary on Wednesday. “We can see that we have flattened the curve, and we can reasonably project when the pandemic will be brought under control. We are not at that point yet, but at least we can see it.”

Energy companies have been a key driver of the rally, with the S&P 500 energy sector up more than 17 percent in April. Exxon Mobil (XOM) and Chevron (CVX) are up more than 15 percent, with investors hopeful that Saudi Arabia and Russia can settle the price war that has driven American oil prices down almost 60 percent this year.

Paradoxically, some of the most skeptical investors — short-sellers, who make their money betting that shares will fall — have contributed to the rally.

Short-sellers borrow shares and immediately sell them in the hope that they can buy them back later at a lower price and pocket the difference. But when the market goes against them and share prices rise, short-sellers can face disastrous losses if they don’t quickly buy back the shares and return them to their lender.

Retail shares have bounced back in April, most likely driven by short-sellers rushing to cover their bets. Nordstrom (JWN) and Macy’s (M) — both up more than 20 percent this month — were top targets of short-sellers in recent weeks, according to S3 Partners, which tracks the activity of short-selling. Airlines, another soaring part of the market in April, have also probably benefited from a similar rally.

And don’t underestimate the fear of missing out. As shares rise, professional money managers feel pressure to buy stocks to protect their reputations.

“If you wait until the coast is clear, you will have missed a huge part of the gains,” said Matt Maley, chief market strategist at Miller Tabak, a trading and asset management firm. “And professional investors can’t afford to do that.”

While many money managers remain acutely aware that stocks may could fall back to the low levels seen in March, when the S&P 500’s 11-year bull market ended, they can’t afford to fall too far behind key market indexes for fear of underperforming their peers and costing themselves customers.

Concerns over so-called career risk can overwhelm fundamental analysis of stocks and bonds, forcing a headlong rush into markets even if a buyer doubts the rally can last.

“He has to go with the market when it rallies at least to a certain degree, because his job depends on it,” Mr. Maley said.

Even the positive news about the virus and the government’s response have been tinged with worrying caveats. The rate of new infections has slowed in New York, but there are higher rates in other parts of the country. A crucial part of the $2 trillion relief package — a program offering forgivable loans to small businesses — has been slow to ramp up. And the vast job losses trigged by the outbreak will depress consumer spending.

In recent weeks, Wall Street analysts have sharply marked down their expectations for earnings this year. They now expect that profits for S&P 500 companies will fall 7.7 percent this year, according to data from Refinitiv.

Mr. Yoshikami has been cautioning some clients that it’s quite possible for stocks to tumble 20 percent from where they currently sit, a position clients seem to instinctively understand.

“They’re very, very skeptical of the rally,” he said. “They’re grateful for it. But they’re very skeptical.”

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