Fear fading on Wall Street as investors learn to love the new bull market
Fear is ebbing on Wall Street, with stocks on a bull run in the midst of the global coronavirus pandemic.
The Cboe Volatility Index , known as Wall Street’s “fear gauge,” is near its lowest level since late February and options markets are showing diminishing concerns of a near-term drop in equities.
The S&P 500’s .SPX run to fresh highs has come as some of Wall Street’s biggest banks, including Goldman Sachs, UBS Global Wealth Management and Morgan Stanley, turn more bullish on stocks and are urging clients to remain exposed to equities. The index ended at a record high on Tuesday, confirming a bull market, according to one definition.
Investors may well heed their advice: nearly 80% of fund managers surveyed by BofA Global Research, the highest level in more than a decade, expect the global economy to grow over the next year. The survey also showed falling allocations to cash, another sign of increasing bullishness.
The growing optimism is in contrast to the fear and gloom that prevailed on Wall Street only months ago, after the S&P 500 plunged 34% in just 23 trading days and the economy entered a recession that would turn out to be its worst since the Great Depression.
Although financial pain remains acute for many Americans, monetary support from the Federal Reserve and expectations for advances in fighting the coronavirus pandemic have made investors more confident in betting on the future, said Quincy Krosby, chief market strategist at Prudential Financial.
“You have a market that sees that we’re getting closer and closer to a more normal world,” she said.
Options markets are among the areas reflecting fading investor worries. Demand for protection against drops in U.S. equities of 30% or more has fallen as volatility has eased in recent months, said Paul Sandhu, BNP Paribas Asset Management’s head of multi-assets quant solutions in the Asia-Pacific region.
“The fear has definitely lessened over the (past) couple of months,” he said.
Meanwhile, selling of protective put options in individual stocks is up over the past week, said Christopher Murphy, co-head of derivatives strategy at Susquehanna Financial Group. Put sellers profit if the underlying stock does not drop to a specified level.
The put selling suggests investors are less worried about the downside, Murphy said.
In futures markets, net long equity positioning is now at its highest level since early March, with increases in both large-cap and small-cap stocks, Deutsche Bank data showed.
The increasingly bullish positioning dovetails with the messages coming from big Wall Street banks. Goldman Sachs, for instance, raised its year-end target for the S&P 500 earlier this week to 3,600 from 3,000, citing expectations for outsized growth in U.S. corporate earnings and gross domestic product next year.
Stocks have dipped since Tuesday, but several market strategists said they saw the pullback as routine rather than a sign that equities had been overbought.
Yet there are plenty of reasons for investors to be nervous and some remain skeptical of buying near all-time highs.
One concern is the potential of market volatility stemming from delayed or contested results in November’s U.S. presidential election. The Dow Jones Industrial Average .DJI fell 5% in two weeks on the heels of a vote recount in the 2000 presidential election, UBS noted.
Other risks include a resurgence of COVID-19 cases, delays in a vaccine or delays by lawmakers in providing more stimulus to the still-ailing economy.
Some of that uncertainty has been reflected in the price of gold, a popular haven that has climbed to record highs this month. Prices recently got an additional boost after Berkshire Hathaway Inc (BRKa.N) disclosed a stake in Barrick Gold Corp (ABX.TO).
Still, some investors believe the prospect of economic recovery now outweighs those risks. Keith Lerner, chief market strategist at Truist/SunTrust Advisory Services, is maintaining an overweight position in U.S. equities.
“We’re not taking anything off the table,” he said. “We’re staying with the primary trend, which is still higher.”