Investor anxiety turns to greed, driving risky market meltdown

Stocks, bonds and commodities are headed for their biggest simultaneous increase in four months, a breakthrough in the teeth of an economic slowdown that some investors find as troubling as it is remarkable.

As of Thursday, the S&P 500 and S&P GSCI commodity indexs have each risen more than 25% since late March, while the US Bloomberg Barclays aggregate bond index added more than 3% over that span. If gains are sustained through the last week of July, this would be the first time that all indicators increased so much over a four-month period, according to an analysis by Dow Jones Market Data dating back to 1976.

Despite the recent surge in coronavirus cases, faith in government and central bank stimulus programs and hopes for vaccine development are driving asset prices up. The broad advance is forcing many skeptical investors to cut their cautious bets and join the rally, giving it more fuel.

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Now some analysts see recent signs of a “merger” in which investors are buying things simply because they are going up, with little regard for economic fundamentals or mixed signals sent by assets, including stocks and bonds going up together. . Traders are driving the momentum on everything from big tech stocks like Apple Inc. to precious metal silver.

Such powerful increases are a concern for analysts who worry that investments will suddenly fall in tandem if trade patterns change or the pandemic worsens, fueling a broad pullout from the market. Memories remain fresh of a violent concussion in March during which investors sold shares and left assets normally considered paradises when governments cut business and travel.

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But analysts say the recent escalation could still take longer than anticipated, with many investors piled high with money raised during the turmoil earlier this year that is now getting on the bandwagon. Synchronous gains in stocks and assets considered safe as gold indicate that investors are amplifying bullish bets while paying more to cover their bets.

“People are getting on the train and also looking to get something else in their wallet by the time judgment day comes,” said Christopher Stanton, chief investment officer at Sunrise Capital Partners. Stanton is betting against the dollar, hoping the Federal Reserve’s stimulus programs will continue to weaken the currency, boosting equity investments into dollar-priced products.

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Still, he warned that uncertainty over government or central bank policies could cause markets to plummet, noting that the November presidential election could spark such a change. Many investors fear that presumptive Democratic candidate Joe Biden will raise corporate taxes if elected.

“In 90 days, all of a sudden, we might hit a brick wall,” he said.

Another factor investors are concerned about: A large chunk of the stock market’s gains has been focused on tech giants like Apple, Amazon.com Inc., the parent company of Google Alphabet Inc. and Facebook Inc. reporting earnings this week. Investors pulled out of tech stocks late last week, dragging down major indexes.

The S&P 500 reached its highest level in five months on Wednesday before falling at the end of the week. It is approximately 5% below its all-time high in February. Numerous other investments lasted for a week, including products such as oil and corporate bonds.

Expectations that the Fed will maintain rates close to zero have kept the benchmark 10-year US Treasury yield near its record low in March. Yields fall as bond prices rise, and steady demand for bonds pushed investment-grade corporate bond yields to record lows last week.

Nela Richardson, investment strategist at Edward Jones, said the company recently reduced its cash holdings and increased positions in high-yield corporate bonds, citing non-existent returns from holding cash at rates close to zero.

“We are all in a poor performance environment,” he said.

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Markets continue to rise even with many large companies painting a murky picture of the economy, underscoring investor faith in new stimulus programs. Last week’s changes came after European Union leaders agreed on a spending package of more than $ 2 trillion. Many investors also hope that US lawmakers will soon reach an agreement on additional aid for the coronavirus.

“You don’t want to fight the Federal Reserve, the world’s central banks, or the world’s governments,” said Thomas Martin, senior portfolio manager at Globalt Investments. The company’s investment in stocks is in line with the benchmark it tracks and has held gold in its asset allocation strategies.

Investors buy gold in uncertain times, and precious metals also benefit from the onslaught of money being used to shore up the world economy. Some analysts expect the stimulus to fuel inflation, eroding the purchasing power of paper money and making metals more expensive. But even within metals, traders see signs that investors are flocking to the sector because prices are rising.

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Such moves often occur after the number of investors holding an asset declines, then money managers seek to catch up with a rising market. Investor positioning declined recently across all asset classes following the market sell-off earlier in the year. Investors are now gradually increasing those positions, a trend that could continue to support stocks, analysts at Deutsche Bank said in a recent note.

Analysts say there is still not over-optimism in the overall markets, although high-flying stocks like electric car maker Tesla Inc. are a concern to many.

“For many people, it is difficult to look at an action like [Tesla] that goes up and up and up and it doesn’t feel like you’re missing out, “said Victoria Fernandez, chief market strategist at Crossmark Global Investments.

The company has reduced its positions in some large technology companies that have increased considerably such as Apple and Microsoft Corp., while increasing its holdings of cyclical stocks more linked to the economy, such as JPMorgan Chase & Co.

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