Wall St urges caution as bullish investors rush into recovery bets

Wall Street banks are warning investors to brace for a new wave of declines in global markets after stocks rushed back towards a bull market from the ugly falls driven by coronavirus in March.

The US benchmark S&P 500 index had jumped 2 per cent by lunchtime on Wednesday, placing it 20 per cent above the nadir of March 23 in a bounceback that has been almost as intense as the sell-off it followed.

But many strategists warn that while central banks and governments have taken the sting out of market disruption with their interventions, more problems may lie ahead.

“My concern is this relief rally might not be sustainable,” said Mislav Matejka, global equity strategist at JPMorgan.

Goldman Sachs and Citigroup have also urged caution, particularly as the companies absorb the scale of the shock from the pandemic. “Equity markets may need to fall 50 per cent before they have priced in this year’s likely earnings drop,” Robert Buckland, head of equity strategy at Citi said.

Line chart of  showing S&P 500 this year

In a note to clients this week, Goldman Sachs’ strategists said equities are already pricing in a recovery in economic growth, even as the extent of the corporate shock remains unclear. “This increases the risk of disappointment near term,” they said. 

The rebound since late March has coincided with signs that the virus may have peaked in some of the worst-hit parts of the world, raising hopes that the lockdowns that have hit economies from the US to India could soon be lifted.

But the economic damage has already been done and on Wednesday new forecasts showed the German and French economies are in the historic recessions.

Column chart of S&P 500 % daily change showing Wall Street's run of large daily moves

Salman Baig, multi-asset investment manager at Swiss fund Unigestion, believes the bounce is a “bear market rally” and sees a “decent chance” of stocks falling back to last month’s lows. “In a couple of weeks we get corporate earnings season, and investors will get to see just how bad it will be,” he said. 

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Some are betting that the worst is over. “You should have a buy-the-dip mentality now,” said Michael Wilson, chief US equity strategist at Morgan Stanley, arguing that a recession forged out of a public health crisis has led government and central banks to react on an unprecedented scale.

“The virus has already created the recovery through the stimulus, it is a timing question now,” he said.

Some billionaire investors have also spotted a buying opportunity. Oaktree Capital Management’s Howard Marks, a market veteran, revealed in his latest memo to clients that the investment group he founded had also started to dip back into the market, despite the risk of further declines.

“It’s not easy to buy when the news is terrible, prices are collapsing and it’s impossible to have an idea where the bottom lies. But doing so should be the investor’s greatest aspiration,” he wrote.

Adam Street Partners, a private capital firm, is also starting to take advantage of the dislocations in credit markets caused by March’s sell-off. “We’re pursuing numerous opportunities right now, with companies that will come through this,” said Jeff Diehl, head of investments at the firm. “The hardest part is the psychological side of things, but I have a ton of confidence in human ingenuity.”


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