These investors are helping drive market's surprise rally

Rebound has been powered by shares in some of the biggest companies, by investors targeting a few sectors.

  • By Dawn Lim and Juliet Chung,
  • The Wall Street Journal
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When the stock market plunged in March, John Rogers Jr. sensed a discount of a lifetime.

Mr. Rogers’s Chicago investment firm moved quickly, increasing holdings in the media sector. Ariel Investments added to its holdings of ViacomCBS Inc. (VIAC), television-station operator Tegna Inc. (TGNA), People magazine publisher Meredith Corp. (MDP) and cable network MSG Networks Inc. (MSGN)

The firm believes advertisers will return to cable and media companies once the spread of the new coronavirus is under control. They were among other bets—including a dental-products company and a ski-resort operator—Ariel has made since March.

“When you get this panic buying at the bottom, you don’t have a lot of time to sit,” said Mr. Rogers, Ariel’s chairman and investment chief. He said he is confident the companies he is wagering on will ride out the pandemic, and expects his roughly $10 billion value investment firm will hold those stocks for years.

The pandemic ushered in the worst economic slump since the Great Depression, but investors have sent the S&P 500 (.SPX) soaring by 32% since the March lows. The large rebound has been confounding in its swiftness and magnitude. The disconnect has sparked debate and discussion at family dinner tables and in corporate boardrooms.

The rally has been powered disproportionately by shares in some of the biggest companies, and by investors making targeted bets on a few sectors. They have favored areas including health-care and energy companies, and those benefiting from shelter-in-place orders and remote working. Inc. (AMZN) and Microsoft Corp. (MSFT) 0.96% have been two of the biggest beneficiaries in the rally and lifted broad market indexes because of their outsize weighting.

With interest rates near zero and the Federal Reserve’s moves to support markets, some investors also feel there aren’t better investment options than stocks. This viewpoint is so prevalent it has earned a shorthand: TINA (There Is No Alternative).

Investors’ choices and the thinking behind their investments raise questions about whether a broad market recovery is actually in the works.

Investors have been “buying the safer, long-term, secular-growth stories such as U.S. technology and health-care stocks,” said Anwiti Bahuguna, head of multiasset strategy at Boston-based money manager Columbia Threadneedle. She has been reducing her portfolio’s allocation to equities since February, partly because of the economy’s deterioration.

“It’s very much a picture of people buying what is safer, what’s defensive and what’s worked over the last decade,” Ms. Bahuguna said.

Tech companies did heavy lifting in the rally that followed the market’s low on March 23.

The technology-heavy Nasdaq Composite Index (.IXIC) rose more than 34% through May 18. Meanwhile, the S&P 500 rose 32% and the Russell 2000 index (.RUT) of small-cap companies gained 33%.

Investors in exchange-traded funds and mutual funds went from buying broad exposure to U.S. equities in March to wagering on specific sectors in April.

Investors in April took a net $18 billion out of mutual funds and exchange-traded funds that invest across the U.S. stock market, according to Morningstar U.S. fund data. They channeled $16 billion into sector-focused funds, a monthly high for such investments since 2014. Some health-care and technology ETFs took in heavy inflows, as investors sought exposure to businesses involved in fighting the coronavirus and companies behind the technology for people to work from home.

David Bahnsen started buying U.S. stocks in late March.

The investment chief for wealth-management firm Bahnsen Group saw few attractive alternatives to stocks. He also wanted to take advantage of the Federal Reserve’s aggressive actions to buoy markets.

In late March, Mr. Bahnsen bought companies including energy giants Chevron Corp. (CVX) and Exxon Mobil Corp., (XOM) and financial companies Apollo Global Management Inc. (APO) and Blackstone Group Inc. (BX), believing they had sold off too much and that they would increase their dividends long term.

He kept buying in April as new clients came in. In the past several weeks, he has pulled back clients’ exposure to corporate and municipal bonds and plans to deploy that cash to buy stocks over the next nine or so months.

“There’s no precedent for [the Fed] increasing their balance sheet and it not boosting equity prices higher,” said Mr. Bahnsen, whose $2.3 billion firm invests clients’ money with outside money managers but invests their stockholdings in-house.

The $18 billion Kentucky Retirement Systems directed more than $1 billion into equities between the end of February and the end of March. By April’s end, the pension’s stockholdings were in excess of what it was targeting.

The Kentucky fund has since cut its stock exposure by $726 million.

“We decided in February that it was an appropriate time to put risk on in the portfolio,” said Executive Director David Eager. “We had such a significant run that we were overexposed.”

At the same time, some pensions and large investors were buying, so were retail customers of one of the largest U.S. online brokers.

In the first quarter, there were 1.55 buy orders for every equity sell order from Fidelity Investments’ retail brokerage clients, according to data on customers’ trades of stock and equity products. That is up from an average buy-sell ratio of 1.22 last year. Fidelity has more than 30 million brokerage accounts.

Some wealthy investors were more cautious.

Single family offices were net sellers of stocks nearly every day since March 23, according to aggregated client data of more than 170 such firms analyzed by wealth-management software provider Addepar Inc. The family offices, which manage several hundred billion dollars in assets cumulatively, had been net buyers in prior weeks during the selloff.

Hedge funds were net buyers around market lows the last two weeks of March, according to data from Goldman Sachs Group Inc. They shifted to become net sellers in April, when the S&P recorded its biggest monthly gain in more than 30 years. They became buyers again in May, a Morgan Stanley (MS) client note said, focusing on tech companies and businesses that appear likely to benefit initially as the economy reopens.

Some of the buying was to cover bets against companies; stocks that have been popular “shorts” among hedge funds have rallied faster than the broader market in both April and May, Morgan Stanley said.

Billionaire investor Stanley Druckenmiller preached caution to members of the Economic Club of New York during a streamed interview last week, referencing existing uncertainty and the prospect of coming bankruptcies.

“The risk-reward for equity is maybe as bad as I’ve seen it in my career,“ Mr. Druckenmiller said, according to the Club’s Twitter feed. ”The wild card here is the Fed can always step up their purchases.”

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