The U.S. stock market’s rally since late March has been hard to take for many people—including those professional investors who stayed pessimistic too long and missed out on much of it.
There’s a rueful saying among traders that markets will move in whatever direction that will cause them the most pain. Pros who mistrusted the rally have performed worse since the March low than the so-called dumb money—buy-and-hold investors who rode the market down and right back up. “The people who hate the rally are the people who are market gurus, because it makes it seem like their expertise is useless. And guess what? It is useless,” says Aswath Damodaran, an expert on valuation at New York University’s Stern School of Business. “Those people exist to make soothsayers look good.”
The stocks that the pros picked to do the worst have performed better than the market averages. Goldman Sachs Group Inc. maintains a basket of the 50 companies with more than $1 billion each in market value that have the most short interest—i.e., bets that they’ll fall—as a share of their value. The basket’s membership changes once a month, and each stock is given the same weight. Its value has risen 73% since March 23. Undoubtedly, some of the rise was caused by investors who had to buy shares to get out of their negative bets.
This isn’t quite the most hated rally ever. That honor probably belongs to the one in 2009 that followed the financial crisis, according to an interpretation of data by Mark Hulbert, president and founder of Hulbert Financial Digest. He looked at recommendations by market-timing newsletters. These are a notorious contrarian indicator; when they’re maximally bearish, it’s a good time to buy. Indeed, in 2009 and this year, the average newsletter was telling its readers to go short—i.e., bet on a further decline—right when the market was at its low. But newsletters became bullish earlier in this rally than they did in 2009, according to Hulbert’s calculations. As of June 8, their bullishness on stocks was stronger than the average has been on 91% of trading days since 2000. That could mean it’s a good time to bail out.
The Federal Reserve put a floor under the market in March—snatching away the opportunity to get stocks at bargain prices—by liberally making loans and buying bonds. That mattered more to investors than record job losses did. “The data’s out there. Nobody cares. The only thing they see is the Fed is buying financial assets,” says Charles Sizemore, chief investment officer of Dallas-based Sizemore Capital Management LLC.
To be fair to the skeptical pros, loading up on stocks on March 23 may look smart in hindsight but would have been rash given what people believed at the time about the global spread of Covid-19. “Our approach was it’s a safer bet to be in bonds than stocks,” says Timothy Hayes, chief investment strategist for Ned Davis Research Inc. in Venice, Fla. The company has since raised its target allocation for stocks to 55% from 40%.
The case for today’s valuations is that corporate profits will snap back as the economy reopens and that the Fed will continue to keep interest rates low, spurring growth and making stocks look attractive in relation to interest-earning securities such as Treasury bonds. NYU’s Damodaran says the S&P 500 is probably fairly valued at 2,900 to 3,000 based on projected earnings, interest rates, and other factors, but its current level of about 3,200 is “not so wildly inconsistent where you’d say it makes no sense.”
There are deeper reasons to worry about this rally. If it holds, it will exacerbate the inequality brought into view by the crises of recent months. For some, the restoration of 401(k) balances is splendid. But the Fed’s latest Survey of Consumer Finances in 2016 found that just over half of Americans reported having retirement accounts, and half of those who did had less than $60,000 in them. Hispanics and black people were half as likely as non-Hispanic whites to have retirement accounts, and the accounts’ median value was one-quarter that of whites’, the survey found.
Meanwhile, 6.5% of households don’t even have bank accounts, let alone brokerage accounts, according to the Federal Deposit Insurance Corp. So their $1,200 stimulus checks are delayed by weeks or months, says Tyrone Ross Jr., a financial consultant and founder of 401stc LLC. “You’re sick, your neighborhood is torn down, and the news leads with ‘the stock market is up 300 points today,’” Ross says. “That can be a very frustrating thing,”
For pros, a surprise bull market is humbling. But for many ordinary Americans, it may feel like a dismissal.
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