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The Return Of The 'Everything Rally' Is Here

The financial markets are currently witnessing a phenomenon that's been absent for quite some time. Specifically, we haven't observed larger cross-asset rallies transpiring within a single week since as far back as 2020. This buoyant sentiment is linked to the hope that the Fed's monetary policies will continue to support the economy's recovery, even amid concerns about potential inflationary pressures.

July 14, 2023
12 minutes
minute read

The equity advance of 2023, eagerly anticipated by the financial markets, is finally manifesting in a broadening pattern, delivering profits to sectors that even the most optimistic bulls may approach with a degree of caution.

From the sturdiest to the most fragile, various types of financial "boats" are benefitting from the rising tide in stocks. This upward shift is part of the cross-asset "everything rally" that has, this week, achieved its highest level in three years.

The benefits of this rally are far-reaching, with sectors such as banking and commodity production reveling in the ascent.

However, this prosperity also extends to shakier propositions. Meme stocks, for instance, enjoyed their most successful week since January, and unprofitable tech companies experienced an 11% leap in their share prices.

Regarding this widespread rally, Abby Yoder, a U.S. equity strategist at JPMorgan Private Bank, expressed a level of uncertainty. She said, “I don’t know the staying power of the ‘junk rally,’ because it’s more sentiment driven — it’s not fundamental driven,”

Yoder further pointed out the looming question on the minds of investors, regarding the slowing pace of growth. "Whether you belong to the camp predicting an imminent recession or the group anticipating a soft landing, it's clear that growth is likely on the decline," she concluded. The future remains uncertain, but the current climate suggests a surge that embraces all, regardless of their financial strength.

Source: Goldman Sachs & TradeAlgo

Investors rooting for the toppling of the artificial intelligence hegemony, which has controlled the markets since last December, may want to rethink their wish. The cyclical playbook that has emerged since the pandemic onset seems to imply caution: The market experiences an uptick, sceptics invest, only for a speculative frenzy to occur, causing gains to evaporate shortly after.

Whether or not we're seeing a recurrence of this pattern, the past week has displayed an almost unparalleled level of positivity across various asset classes. A total of five major exchange-traded funds (ETFs) – representing stocks, treasuries, corporate bonds, and commodities – each saw an increase of more than 1.7%. Looking at data stretching back nearly ten years, there's only been one instance of a more substantial unified rally, which was in March 2020.

The mere reference to that specific period may excite bulls. However, numerous factors regarding policy and valuation have shifted dramatically since then. Amid the height of the Covid-19 pandemic, the Federal Reserve took swift action to slash interest rates, while the government issued trillions in stimulus checks to US citizens. At that time, the S&P 500 was priced at around 14 times earnings, and the yield of 10-year Treasury bonds was under 1%.

Fast forward to the present day, and the situation is drastically different. The central bank is implementing the most intense monetary tightening measures seen in decades. The 10-year rate has surged to 3.8%, and the price-to-earnings ratio of the S&P 500 is hovering around the 20 mark. The circumstances have changed significantly, hinting that the consequences of this market buoyancy may not mirror the past.

The prospect of a soft economic landing is looking increasingly likely, given the recent slowdown in inflation and the resilient nature of economic growth. Furthermore, speculation is growing that the Federal Reserve could halt its cycle of interest rate hikes following another anticipated increase later this month. Michael Rosen, Chief Investment Officer at Angeles Investments, attributes the synchronized growth seen across asset classes to the decline in prices.

"Inflation is the bane of every investor's existence. Not only does it negatively impact bonds, but it also takes a toll on equities by eroding profit margins and gradually diminishing wealth for all," Rosen pointed out. "While we're not completely clear of economic uncertainty, positive news is still positive news, and the markets are reflecting that sentiment."

The potential end to the tightening monetary policy has spurred a significant risk-on trend in the currency market. Traders are hunting for higher yields, turning to currencies ranging from the Euro to the Mexican Peso. Meanwhile, the US dollar, a long-favored safe haven, experienced its largest drop since November, shedding over 2% of its value in just five sessions.

In the equity market, sectors that had been pushed to the periphery amid harsh financial conditions are now experiencing a renaissance. A basket of unprofitable tech companies, compiled by Goldman Sachs Group Inc., recorded its best weekly performance since January. Newly-listed shares also saw a surge, with the Renaissance IPO ETF recording a near 7% increase for the week.

Retail investors, who suffered losses in 2022's bear market, are making a notable comeback. The Solactive Roundhill Meme Stock Index, which tracks popular stocks amongst this group, rallied approximately 8% this week, largely propelled by crypto-related stocks.

The week leading up to Tuesday saw day traders acquire a net total of $2.8 billion in shares, an amount significantly exceeding its 12-month average, as per estimates by JPMorgan Chase & Co, derived from publicly available data on exchanges.

Source: Deutsche Bank & TradeAlgo

In other market segments, money managers are reducing their short positions and redirecting their capital towards equities. According to Deutsche Bank AG data, an index that measures investor equity positioning has seen a significant leap from the low levels recorded at the beginning of the year, achieving readings that surpass 68% of those recorded since 2010.

However, this surge in stock purchasing could potentially pave the way for complications. A lesson drawn from the unexpected rally of 2023 suggests that a sense of unease might be the best sentiment bulls could anticipate, as it usually precedes a market rebound. With the resurgence of investment enthusiasm, caution is advised, notes Jake Schurmeier, a portfolio manager at Harbor Capital Advisors.

"The pendulum of sentiment has evidently swung towards the positive extreme," Schurmeier noted. "The shift was quite surprising, and it made me reflect on the 1999/2000 period, which might provide a more accurate comparison in terms of how this could conclude."

Editorial Board
Eric Ng
John Liu
Editorial Board
Bryan Curtis
Adan Harris
Managing Editor
Cathy Hills
Associate Editor

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