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Retail Resolve, Credit Form a Stock Bull Case for Troubled Times

Retail Resolve, Credit Form a Stock Bull Case for Troubled Times

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(Bloomberg) – The courage of small traders and bullish credit signals underpin what remains of the stock market case as markets slide to their worst month since the pandemic panic.

As losses mount for once-hot trades enjoyed by the retail crowd from Netflix Inc. to the ARK Innovation ETF, individual investors have already rebounded from the volatility and remain – potentially – a drag on markets. withdrawals. Indeed, before Thursday and Friday’s turmoil spurred selling among virtually every investor class, they had bought about $12 billion worth of stocks in the two weeks to Tuesday, the record high in the data. of JPMorgan Chase & Co.

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Day-trader confidence is a possible cushion in a market where investors’ nerves are frayed by impending Federal Reserve rate hikes. With the Nasdaq 100 in correction and small-cap companies on the brink of a bear market, crash warnings are mounting amid fears that the central bank’s war on inflation will take the economy with it.

But other metrics — arguably those less prone to hysteria than equities — suggest the end of the world is not near for stock bulls. Amid the market turmoil, high-yield bond risk premia remained subdued, while stocks of companies with weak funding significantly outperformed those with stable balance sheets.

All of this suggests that, as scary as the sell-off might sound, it’s simply an adjustment in investor positioning, as opposed to a mass exodus, according to Kara Murphy, chief investment officer at Kestra Investment Management. Highly valued technology stocks have given up their leadership, but economically sensitive stocks like energy are taking their place on the leader board.

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“There are a lot of stocks that have really benefited from an easier monetary and fiscal environment over the past two years, and these are now seeing some of the wind blowing out of their sails as we believe we are in an environment consistently higher rates,” Murphy said. “We’re not getting a big red flag from high-yield markets about equities and the health of the corporate sector.”

US stocks have lost around $5 trillion since their peak last November, as software and internet stocks with bleeding valuations led the rate-fueled carnage. Down 12% in January, the Nasdaq 100 is on track for its worst month since the 2008 global financial crisis.

Hedge funds, burned by their tight bets on expensive growth stocks, are rapidly unwinding their positions. In the first two weeks of the year, they reduced their net leverage at the fastest rate since April 2020, according to data compiled by Goldman Sachs Group Inc’s leading brokerage program.

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Amateur investors, however, are not bowing despite mounting losses. A variety of factors have been cited as driving the stubborn bull run in retail, from the repeated success of bear buying to the abundance of cash in bank accounts. Another big bull case is the strength of corporate US earnings power.

The ability of American companies to overcome supply chain bottlenecks while achieving strong results has been the backbone of the rally where the S&P 500 has surged more than 110% in less than two years.

While earnings for S&P 500 companies are expected to rise 21% in the fourth quarter, half the rate seen in the prior period, it’s still more than twice as fast as the 10-year average, according to data compiled by Bloomberg Intelligence.

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Admittedly, this reporting season got off to a rough start, with disappointing bank revenues and Netflix results. Still, for Art Hogan, chief market strategist at National Securities, the record should improve.

“What’s going to support the market are the actual results and the outlook versus our current fears that inflation and the Fed will somehow tip over to the apple cart,” Hogan said. . “So as we enter a more robust earnings season next week and hear about companies whose multiples have contracted significantly, we’ll likely start to think of some of those feeling the pressure as having been overdone. .”

If equity performance is any guide, the fallout from higher rates will be asset valuations, as opposed to credit risk. Cheap stocks are back in fashion and expensive growth stocks are out. And yet, a Goldman basket of companies with weak balance sheets beat its strong counterpart by more than 10 percentage points in January, en route to the best monthly outperformance since April 2009.

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Investors are likely giving financially weaker companies a pass as, thanks to strong earnings in 2021, corporate America is sitting on a record pile of cash. Meanwhile, raising funds in the bond market seems to be relatively easy.

Junk bonds saw their yield spread over Treasuries near the lowest levels since 2007. As the S&P 500 fell to a three-month low on Friday, the risk premium remained lower than its January 10 level – a sign of no credit stress.

“You see credit spreads widening and people are starting to worry about the credit quality of corporate bonds if they think a recession is on the horizon,” said David Spika, chairman. and Chief Investment Officer of GuideStone Capital Management. “That’s by no means a concern today.”

©2022 Bloomberg LP

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