From Depression to Euphoria: How Cross-Asset Markets Fought Back

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The stock rebound from the depths of pandemic despair is giving Wall Street the lesson of a lifetime on the sheer tenacity of cross-asset bulls.

As the investing world shifts from depression to V-shaped recovery bets, the pros look set to join the mom-and-pop rally that helped push the S&P 500 into positive territory for the year.

With the U.S. equity rally taking a breather in Tuesday trading, it’s time for a gut-check amid the pandemic without a cure as yet. Global stocks are on a tear, valuations are climbing, once-frozen funding conditions are thawing.

Investors are even rushing back into negative-yielding corporate debt in Europe, underscoring the fast recovery of this credit cycle.

It’s all a world away from the March 23 low, when investors fretted about an economic collapse with echoes of the Great Depression. As Ritholtz Wealth Management’s Michael Batnick tweeted, it’s recession to euphoria in under 100 days.

Here’s an overview of the market turnaround for clues on what’s next.

Stocks

Nowhere are animal spirits more on show than the stock market. Led by the rally in U.S. shares, the MSCI AC World Index has famously climbed more than 40% in just over two months. Investors are tuning out rising corporate leverage and an uncertain post-Covid business cycle to front-run the 2021 earnings cycle on the heels of record stimulus and re-opened economies.

In Europe, laggards such as retailers, cruise operators and airlines are finding favor as traders choose riskier stocks over tech havens.

In a sign of reviving animal spirits, value equities — cheaper often because they are riskier — just posted their best week versus low-volatility shares since the late 1990s.

In some respects, it’s almost as if the pandemic never happened. Take a blended measure of both trailing earnings and forecast estimates that straddles the crisis period on equal-weighted benchmarks, a metric favored by Leuthold Group. It’s climbed back toward pre-crisis levels across the U.S. and Europe.

Credit

Stock investors are taking their cues from the world of credit. Unprecedented stimulus from the Federal Reserve has pushed the credit spreads of U.S. companies most at risk of downgrade to junk status, almost back to pre-crisis levels.

Meanwhile, a bond market oddity that looked set to go extinct has made a comeback. Some 67 billion euros ($75 billion) of high-grade corporate bonds in Europe now trade with a negative yield, which effectively guarantee a loss for investors who hold them to maturity. While this is a fraction of the amount raised early this year, it’s a swift turnaround from a grand total of zero issued in late March.

Funding Markets

Another area of acute investor concern is also back to normal. U.S. commercial paper rates — once at the crux of money-market stress — are troubled no more. And that has contributed to the decline in three-month dollar Libor, a benchmark for rates on lending between banks.

Money managers have unprecedented central bank rescue measures to thank for the recovery. Co-ordinated action to unfreeze dollar liquidity and a slew of asset-purchase programs helped squash the spike in funding costs seen in March.

Another sign of the improvement in risk sentiment is the rapid slide in the U.S. currency. After a surge in March as investors rushed into haven assets, the Bloomberg Dollar Spot Index has slumped back toward its two-year average.

— With assistance by Ksenia Galouchko, Tasos Vossos, and Justina Lee

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