The bulls are back following a massive almost 40 per cent upwards run over the last 50 days, but bearish investors are holding on to a range of theories as to why the worst is yet to come.

Since the March 23 low, stocks have run harder than any other time than in 1957 when the S&P 500 moved to 500 stocks, said LPL Financial senior market strategist Ryan Detrick in a blog post about US markets.

“Big 50-day rallies in the past have taken place near the start of new bull markets, and the returns going out a year were quite bullish,” he said.

Those rallies delivered strong returns over the following six to 12 months.

Massive monetary and fiscal stimulus unleashed on global markets by governments desperate to avoid economic collapse is driving the run, fending off fears of rising debt and the still-likely possibility a vaccine will never be found.

The stimuli have “lobotomised” returns from bonds while at the same time added to a global cash glut, Michael Kelly, a managing director at PineBridge Investments in New York, said last week.

“The first earnings of the recovery so far have been completely central bank driven. They were not driven at all by any confidence that the economy was going to recover,” he told a conference by Morningstar, a financial information service.

In spite of a surfeit of negative economic data, the expectation of lower profits, a slide to loss, and possible defaults in the upcoming earnings season, investors are hoping lower COVID-19 case numbers and faster economic re-openings mean the end of this year and 2021 will be good for growth.


Keeping rotating

The record-breaking run since March has markets looking “toppy”, as one Australian advisor told Stockhead, but he also pointed to the enormous scale of the sell-down that preceded it.

The reaction of investors has been to shift focus from defensive sectors such as healthcare to companies that had been ignored in the financial sector and even travel.

Principal Global Investors chief global economist Robert Baur says a shift to small caps, value stocks, and materials companies meant those sections of markets did well in May, but the big US technology companies are (still) looking expensive.

“More of that rotation is needed for the advance to persist. We think it will occur. So, on a six- to nine-month basis, we’d stick with stocks that do well when growth picks up: cyclical sectors like materials, financials and industrials, small caps, value stocks,” he wrote in his June note to investors.

In Australia, Morningstar analyst Adam Fleck has added Southern Cross Media (ASX:SXL), burns treatment company Avita (ASX:AVH), and G8 Education (ASX:GEM) to his list of prospective growth companies.

Matt Wacher, Morningstar’s chief investment officer, says the company is picking equities, particularly those in Australia, Europe and Japan, energy, emerging market investments, and investment grade and high yield debt as locations for money wanting returns this year.


When bears attack

Bears — the pessimists of the investing world — finally had the crash they’d been calling since 2009 in March. The subsequent exuberance has them on the run again.

PineBridge Investments’ Kelly says his fund is deep in gold, as he believes governments’ fiscal stimulus is Modern Monetary Theory (MMT) in action which will generate huge inflation and destroy returns.

MMT is an economics theory that’s gained currency in the last few years that a balanced budget is not completely necessary for governments and that deficits, instead of being an anathema, should be a key part of a normal state budget that enables a country to spend what it needs to, provided it doesn’t drive up inflation.

The other view is that governments have not embarked on MMT, but have simply loaded up on debt that will have to be paid back.

Tony Cousins, chief of UK fund Pyrford International, believes the equity run has “gone too far”.

Furthermore, without a vaccine for COVID-19 there is little chance of a V-shaped recovery.

“I think we’re looking at a future where the world is saddled with way more debt,” he said last week during the Morningstar conference.

“These [government and central bank spending programs] were necessary, these were the bridge from the pre-COVID world to the post-COVID world that governments had to put in place.

“The problem is the longer this goes on the more rickety that bridge becomes and the bigger the build up in debt.

“We’re very concerned unless there is a rapid return to work and output around the world then the recovery is going to be very, very slow and not V-shaped.”

The problem is, as PineBridge Investments’ Kelly pointed out, that while equities are looking expensive there is now no escape hatch for the flood of cash looking for returns.