It will likely all end in tears – that’s certainly the position of some stubborn skeptics for whom Friday’s monumental rally in US equities was insult to injury.
I’m not sure I’d count myself a “stubborn skeptic” – “plain skeptic” is probably more accurate. I don’t like the idea of paying an indeterminate amount for a dollar of earnings (because there’s not much visibility right now into what profits will look like going forward) but I know better than to doubt the power of the printing press.
You don’t generally want to bet against liquidity-driven markets. I spilled gallons (upon gallons) of digital ink to make that point over the past two months. Betting against central bank largesse has been a fool’s errand in the post-financial crisis world, and the futility of going up against the benefactors with the printing presses is on full display currently.
In March, it looked briefly like popular credit ETFs were on the verge of “breaking”, as net asset values became detached from prices. The figure simply shows the “V-shaped” recovery in the most popular investment grade product as the Fed stepped in during the height of the panic.
But until recently, the bounce in risk assets had a predictable feel to it. The winners were secular growth and especially big-cap tech, which was seen benefitting from work-at-home arrangements and shifts in consumer preferences tied to the pandemic. Credit spreads snapped back tighter as investors looked to front run eventual Fed buying in corporate bonds. And so on, and so forth.
What’s changed over the past several sessions is that the curve has steepened and cyclicals have taken the baton. Reopening optimism is running rampant, and Friday’s jobs shocker turbocharged the dynamic.
This is an especially vexing development for the stubborn skeptic crowd. If cyclicals, small caps, banks, energy, and value shares take off, and long-end yields rise in a benign way indicative of optimism around the growth outlook, it will be more difficult to castigate the rally as just the latest manifestation of the post-financial crisis “slow-flation”, liquidity-driven, melt-up.
A few visuals in this regard are worth highlighting. The iShares Core S&P Small Cap ETF took in $900 million on Thursday, the largest daily haul in years.
XLF (the widely used financial ETF) enjoyed a massive haul this week, while QQQ (the Nasdaq 100 product) witnessed the biggest exodus since October of 2018.
A simple comparison of airline shares (which were up 35% on the week), banks (which rose 17%) and tech tells the story.
The Nasdaq 100’s weekly gain looks wholly pedestrian by comparison. Optimistic investors are now seemingly confident enough in the economic rationale for the rally to put their money where their mouth has been. In other words, folks are now betting on the things that would benefit if the US economy is, in fact, poised to rebound in “V-shaped” fashion.
Perhaps the most amusing manifestation of dip-buying (likely by retail investors), bottom-calling, and reopening optimism, comes courtesy of the “JETS” ETF, which Bloomberg’s Eric Balchunas has spent quite a bit of time marveling at recently.
“All I’m going to say is 66 days and now $1.3 billion”, Eric said Thursday, despite a self-imposed moratorium on tweeting about the product.
The bottom line: Investors are falling out of love with fully-valued secular growth and momentum plays tethered to the assumption that long-end yields will remain subdued in the face of a lackluster economic outlook, and turning instead to “bargains” in all the beaten-down sectors that will surge on an economic renaissance.
It’s a big gamble, that’s for sure. But so is life.