Despite all the difficulties that are affecting investors in global stock markets, it is worse in other markets, and this alone may be enough to keep stocks booming for the time being.
Stocks have recovered in record time from the initial shock of the war in Ukraine and the devastation it wreaked on global commodity supplies, having withstood successive waves of the coronavirus pandemic since 2020, and are now refusing to retreat due to ominous signs in bond markets that a global recession is looming.
Part of the resilience seen recently is due to an entrenched trading pattern of “buy low”, but the wall of concern that equities should rally for now is getting increasingly higher, as rampant inflation pressures demand, economic growth slows, and central banks look To end the era of excessively accommodative monetary policy.
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While all this means that corporate earnings are about to take a hit, stocks may still have an excuse to go up, not least because alternative options are scarce.
“With cash and bonds providing negative real returns, investors are still tempted to buy undervalued stocks in global equity markets despite deteriorating fundamentals,” Citi strategists led by Robert Buckland wrote in a note on Friday.
The March rebound in stocks supports this view, and while the first quarter was the worst for global stocks since the pandemic, the past month has already seen a recovery. It is the shortest bout of the market downturn in the current century.
Apple just enjoyed its longest rally in nearly 20 years, and US stocks rose nearly 10% in the second half of March, and even in Europe, the epicenter of the geopolitical crisis, the Stoxx 600 index made up for initial losses incurred after the invasion. Russian for Ukraine.
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“Bull markets do not end quietly, they have come back after many other crises over the past few years,” said Chris Beauchamp, senior market analyst at IG Group in London. The idea of “buying down” is ridiculous, but it is a sound strategy.
Bond losses
Part of the recovery is due to the recent plunge in another major global asset class, and rising inflation and a scramble for policy tightening by central banks increasingly eager to tame prices have triggered a bond slump.
Moreover, inflation eats up bank deposits, and mortgage interest rises, leaving less room for allocating money.
“The first quarter was tough on stocks, but it was a lot tougher on bonds,” said Marija Wittmann, chief strategist at State Street Global Markets. Safer than other asset classes.
Retail traders may also have played a role in the latest gains, as options markets indicate that stuc-on individual traders, who helped fuel a sharp rally in stocks last year, are buying back. A leading indicator of purchase orders volumes on 23 MIM shares by retail traders is rising to levels reminiscent of previous speculative bubbles.
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There is another force, but it is more technical and less affected by the troubling global headlines about Ukraine and commodities, as market players, such as so-called risk parity funds or managed futures accounts, pumped money into the market as they reallocated investments in proportion to price gains and reduced volatility.
“The systematic strategy to cover short positions and reallocate long investments means that there is a strong buying impulse after the historic bout of debt-funded investment cuts seen in the past six months,” said Charlie McEligot, managing director of cross-asset strategy at Nomura.
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It is estimated that these players have bought more than $61 billion worth of stock futures contracts over the past month.
Inversion of the yield cure
When it comes to negative economic signals, strategists at JPMorgan are among those reassured that the most recent inversion in the US Treasury yield curve does not portend imminent trouble, and even if forecasts eventually prove correct, usually with a long interval, indicating Barclays notes that stocks typically rise in the intervening period.
Strong US employment numbers are among the reasons investors are ruling out a near-term recession, but there is also the protection provided by consumer savings accumulated during the pandemic and strong corporate financial positions to fund buybacks.
Simultaneously, the post-invasion energy price shock subsided, and Europe's reluctance to impose sanctions on Russia's energy sector, and the planned release of US reserves, helped ease the crisis, bringing prices back down to around $100 a barrel.
For those who are convinced that the recovery continues, the question is what to buy? Philip Jabre, founder of Jabre Capital Partners, says his multi-asset hedge fund focuses on stocks with exposure to commodities and financial services.
The global wealth management arm of UBS sees opportunities in energy, food, data and climate, sectors that are set to benefit from a renewed focus on security and stability. Growth versus value, looking for individual companies “that can innovate, tip the scales, enable and adapt” as well as focus on margins.
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However, both say the upside is limited for the broader market, and the Bank of America team cautioned that the most recent recovery is a bear market trap. Barry Norris, who runs Argonaut Capital Partners, a hedge fund, sees the rally lift a lot of stocks "while fundamentals are deteriorating further and there is no valuation support".
"We are in the early stages of this bear market, and we will see new lows over the course of the summer," he added.
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