Is the return of the 'everything rally' a cause for concern?

Traders at the New York Stock Exchange. Weakening prices, in particular, are driving the synchronised gains across assets, experts say. Reuters

The long-awaited broadening in the 2023 equity advance is bringing gains to corners of the market even unabashed bulls may view uneasily.

Boats seaworthy and otherwise are being lifted by the rising tide in stocks, itself part of a cross-asset “everything rally” last week that was the biggest in three years.

Gains spread, with banks and commodity producers in the ascendant. And there were flimsier propositions: Meme stocks had their best week since January, while unprofitable tech companies rose 11 per cent.

“I don’t know the staying power of the ‘junk rally’, because it’s more sentiment driven – it’s not fundamental driven,” said Abby Yoder, US equity strategist at JP Morgan Private Bank. “Regardless of whether you’re in the camp of us going into a recession or a camp of a soft landing, the reality is that growth is probably slowing.”

For bulls who have been calling for the unseating of the artificial-intelligence oligarchy that has ruled markets since December, it s a case of be careful what you wish for, at least going by the cyclical playbook that has prevailed since the pandemic.

The market gets a lift, sceptics buy in – then speculative fever breaks out in time for gains to fizzle.

Whether the pattern is repeating, this was a week of nearly unprecedented buoyancy across asset classes.

Among five major exchange-traded funds tracking stocks, Treasuries, corporate bonds and commodities, each was up more than 1.7 per cent. In data going back almost a decade, only once was there a bigger concerted rally: March 2020.

And while that particular echo may stoke bulls, a lot has changed between now and then in terms of policy and valuation.

Back when the pandemic was raging, the Federal Reserve rushed to lower interest rates and the government doled out trillions of stimulus checks to Americans. The S&P 500 was valued at roughly 14 times earnings, while 10-year Treasury yield stood below 1 per cent.

Now, the central bank is in the midst of the most aggressive monetary tightening in decades, the 10-year rate has risen to 3.8 per cent, and the S&P 500’s price-earnings ratio hovers near 20.

On the other hand, the prospect of a soft landing has improved, with inflation cooling and economic growth holding up. And the Fed may stop increasing interest rates after another later this month.

Weakening prices, in particular, are driving the synchronised gains across assets, according to Michael Rosen, chief investment officer at Angeles Investments.

“Inflation is the scourge of investors: It harms bonds, of course, but also equities, as it erodes profit margins and destroys wealth over time for everyone,” he said. “We are not out of the woods, although good news is good news, and markets are reflecting that.”

The possible end to monetary tightening jump-started a broad risk-on move in the currency market, with traders seeking higher returns in everything from the euro to Mexico peso.

The US dollar, a long-favoured haven, sank the most since November, losing more than 2 per cent of its value over five sessions.

In stocks, fringe corners are springing back to life.

A Goldman Sachs Group basket of unprofitable technology companies had its best week since January. Newly-minted shares jumped as the Renaissance IPO ETF climbed almost 7 per cent on the week.

Retail investors, who were burnt by 2022’s bear market, are staging a comeback. The Solactive Roundhill Meme Stock Index, tracking the crowd’s favourite shares, rallied about 8 per cent this week, led by crypto-related stocks.

Day traders scooped up a net $2.8 billion of shares in the week through Tuesday, an amount that’s way above its 12-month average, according to JP Morgan Chase estimates derived from public data on exchanges.

Elsewhere, money managers are cutting their short positions while moving cash to stocks.

I don’t know the staying power of the ‘junk rally,’ because it’s more sentiment driven – it’s not fundamental driven

Abby Yoder,
US equity strategist, JPMorgan Private Bank

An index tracking investors’ equity positioning has spiked from depressed levels at the start of the year, reaching readings higher than 68 per cent of the time since 2010, according to data from Deutsche Bank.

As much as the buying urge has propelled stocks, it may sow the seed for troubles.

If there is a lesson to be learnt from 2023’s rally, it is that paranoia is the best thing bulls can hope for because that sets the stage for a market rebound.

With gaming spirits raging back, it’s a contrarian sign to be cautious, said Jake Schurmeier, portfolio manager at Harbor Capital Advisors.

“Sentiment has clearly swung towards the positive extreme,” he said. “It certainly caught me off guard. I think 1999-2000 may be a better parallel in terms of how it ends.”