Two Days of Stock Euphoria Show Risk Appetite Getting Gluttonous

Maybe it was possible to explain past strength in equities as a byproduct of megacap tech in the S&P 500, or strength in health care, or overexcitement for defensive trades.

But two days of buy-everything rallies in stocks, a Nasdaq 100 near-record and a surge in bond yields suggest markets are becoming the site of an old-fashioned risk-on frenzy, signaling straight-up euphoria over the recovery.

Companies, industries, and equity styles that were pummeled in the sell-off roared higher on Wednesday. Financial shares surged on speculation stimulus will bolster an economic recovery, making it more likely for firms to avoid bankruptcies. Real estate developers jumped almost 5% as data showed applications for loans to purchase homes are surging, fueled by record-low borrowing costs.

In the S&P 500, four stocks rose for every one that fell on Wednesday. Boeing Co., Gap Inc. and Wynn Resorts jumped by more than 10%. Only four Dow Jones Industrial companies closed lower.

“What the market is trying to do is put behind a lot of these issues and look toward the reopening of the economy, which is happening,” said Ralph Bassett, head of U.S. equities at Aberdeen Standard Investments, which has about $644.5 billion under management. “It just feels like that’s the sole focus — maybe that’s right. Hindsight will tell us.”

Mall stocks, including Tanger Factory Outlet Centers Inc. and Simon Property Group, surged as retailers started to re-open, fueling hopes consumer will return to brick-and-mortar stores. Shares of Tanger rose as much as 13%, while Simon Property advanced 15%. A tweet about room bookings at Vegas resorts fueled a surge in Las Vegas Sands Corp., MGM Resorts International and Wynn, shares of which were among the most hard-hit at the onset of the outbreak.

Wednesday’s action is a continuation of the rotation that started to take shape late last month, with investors pivoting toward things that can benefit coming out of a recession. Much is a reflection of the hope many have pinned on the Federal Reserve’s ability to backstop the downturn. To Ed Yardeni, the president of his namesake research firm, the central bank has prevented the worst-case scenario.

“The Fed seems to have averted the Zombie Apocalypse with the biggest Fed Put of all times!” he wrote in a note.

Earlier: Investors Pile Into Stocks That Win in a Full Economic Recovery

But investors are also increasingly optimistic about gradual re-openings and a reduction in coronavirus cases. Economic data has started to show slight but steady improvements.

On Wednesday, a private report showed that U.S. companies cut payrolls in May at one-third of the forecast pace, offering some hope that the worst of the coronavirus-related hit to the labor market is over. In addition, data showed service providers last month started to emerge from a pandemic-induced tailspin.

“The stock market is primarily focused on a single thing: the restart of U.S. and global economic activities,” Jim Paulsen, chief investment strategist at the Leuthold Group, wrote in a note. “Whether the recovery proves to be a V or a U may not be as important for the stock market as appreciated. Perhaps, a positive direction and persistence of this bounce is all the stock market needs to keep moving higher?”

Retailers have also gotten a piece of the action. Since Friday, Gap Inc. is the best S&P 500 stock, up 35% in three days. Coty Inc. has surged 30% over the same time period, and Nordstrom Inc. has jumped more than 20%. That’s a stark contrast from recent performance. This year, each is still down at least 30%.

On the flipside, recent winners experienced a massive unwind. A Dow Jones market neutral index that mimics a portfolio that goes long high momentum stocks and shorts low momentum stocks was down close to 5% at one point, the worst day since May 2009. At the same time, a similar index focused on value stocks rose more than 2.5% in a stark reversal of fortunes.

“Do I think things will be better three years from now? Absolutely,” said Kim Forrest, chief investment officer of Bokeh Capital Partners LLC. “Getting there I think will be a wild ride.”

— With assistance by Claire Ballentine

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