The “Everything Rally” is back. Same goes for the casino crowd

(Bloomberg) – The long-awaited widening of the 2023 equity lead is bringing gains to the corners of the market, even unapologetic bulls can view with trepidation.

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Seaworthy boats and the like are being lifted by the rising tide of stocks, itself part of a multi-asset “everything rally” that was the biggest in three years this week. The gains spread, with the ascendancy of banks and commodity producers. And there were more flimsy propositions: Meme stocks had their best week since January, while unprofitable tech companies jumped 11%.

“I don’t know the lifespan of the ‘junk rally’ because it’s more sentiment-driven — it’s not fundamental-driven,” said Abby Yoder, US equity strategist at JPMorgan Private Bank. “It doesn’t matter if you’re in the camp where we’re entering a recession or in the camp of a soft landing, the reality is that growth is probably slowing.”

For bulls calling for the overthrow of the AI ​​oligarchy that has ruled the markets since December, it’s all about being careful what you wish for, at least following the cyclical playbook that has prevailed since December. pandemic. The market heats up, skeptics rally, and then speculative fever erupts just in time for earnings to crash.

Let the pattern repeat, it was a week of near-unprecedented momentum across all asset classes. Of the top five exchange-traded funds that track stocks, treasuries, corporate bonds and commodities, each rose more than 1.7%. In data going back almost a decade, there has only been one larger concerted rally: March 2020.

And while that particular echo may fuel the bulls, a lot has changed in the meantime in terms of politics and valuation. During the time Covid-19 was raging, the Federal Reserve rushed to cut interest rates and the government handed out billions in stimulus checks to Americans. The S&P 500 was valued at around 14 times earnings, while the 10-year Treasury yield was below 1%.

Now the central bank is in the midst of the most aggressive monetary tightening in decades, the 10-year rate has jumped to 3.8% and the S&P 500 price-earnings ratio is hovering around 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 raising interest rates after another hike later this month. Weakening prices in particular lead to synchronized gains across assets, according to Michael Rosen, chief investment officer at Angeles Investments.

“Inflation is the bane of investors: it hurts bonds, of course, but also stocks, because it erodes profit margins and destroys wealth over time for everyone,” he said. “We are not off the hook, although good news is good news, and the markets reflect that.”

The possible end to monetary tightening has sparked a broad risk-taking movement in the currency market, with traders seeking higher yields in everything from the euro to the Mexican peso. The U.S. dollar, a long-favorite safe haven, fell the most since November, losing more than 2% of its value in five sessions.

In the stock market, fringe coins, once left for dead under tight financial terms, are coming back to life. A basket of unprofitable technology companies from Goldman Sachs Group Inc. had its best week since January. Newly minted stocks surged as the Renaissance IPO ETF soared nearly 7% on the week.

Retail investors, who were burned by the 2022 bear market, are staging a comeback. The Solactive Roundhill Meme stock index, which tracks crowd-favorite stocks, is up around 8% this week, led by crypto-related stocks.

Day traders scooped a net $2.8 billion worth of stocks in the week through Tuesday, well above its 12-month average, according to JPMorgan Chase & Co. estimates derived from public stock market data.

Elsewhere, fund managers are reducing their short positions while redeploying cash to equities. According to data from Deutsche Bank AG, an index that tracks investors’ stock positioning has climbed from depressed levels at the start of the year, hitting readings above 68% of the time since 2010.

As much as the urge to buy has propelled stocks, it can sow the seed of trouble. If there’s a lesson to be learned from the shocking 2023 rally, it’s that paranoia is the best thing bulls can hope for, as it paves the way for a market rebound. With the spirit of the game returning, it’s a sign against caution, says Jake Schurmeier, portfolio manager at Harbor Capital Advisors.

“Sentiment has clearly swung to the positive extreme,” he said. “It certainly caught me off guard. I think 1999/2000 may be a better parallel in terms of the ending.

–With assistance from Isabelle Lee and Emily Graffeo.

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