One-Week Rebound in S&P 500 Means Another Beast Slain for Stocks
(Bloomberg) -- It was supposed to be the punch that landed.
Only seven days ago, freshly arrived at its 17th record of the year, the S&P 500 Index absorbed a body blow that many thought would end six months of peace in equities. Scrutiny was spiraling around Donald Trump’s presidency, and more than $300 billion was erased from U.S. stocks in the biggest rout since September.
Fast forward a week, and the wound has closed. The benchmark climbed 0.3 percent Wednesday, rising for a fifth straight day to send stocks back to all-time highs.
How it happened is a lesson in the forces that have driven a bull market now in its ninth year. Hedge funds were buyers, and so were companies themselves. Technology stocks led the advance, closely followed by utilities that got a boost as bond yields slumped. The biggest five-day advance since the rout is Autodesk Inc., whose earnings unleashed a slew of analyst applause.
The rout and recovery joins other nervous episodes including the British secession vote, Trump’s presidential victory, and elections in France whose hype proved stronger than their bite, at least in the stock market. The CBOE Volatility Index, whose 49 percent surge last Wednesday was the biggest in a year, is back near a decade low of 10.
“One hallmark of this bull market is when we have pullbacks, they’ve been recovered almost immediately,” Hank Smith, chief investment officer at Haverford Trust Co. in Radnor, Pennsylvania, said by phone. “And there is no way you could take advantage of that recovery. It’s very frustrating for investors.”
Not many benefited from the rebound. According to data compiled by Bank of America Corp., its clients remained net sellers of stocks last week. Institutional clients such as pension funds have been net sellers for 14 straight weeks, while wealthy individuals reduced holdings after two weeks of purchases.
Broadly, investors continued to pull money out of stocks despite the recovery. They took almost $2 billion out of exchange-traded funds focused on U.S. Equities over the past five sessions, pushing withdrawals for the month to $14 billion, data compiled by Bloomberg show.
The biggest source of demand was companies themselves, which raised share repurchases last week to the highest level of 2017. Hedge funds also partook in the spree after spending most of the time since mid-March scooping up shares.
Just a week ago it looked like Donald Trump’s presidency would prove too unstable for markets to maintain the buoyancy that had lasted for six months. The S&P 500 dropped 1.8 percent in a day, the worst rout in eight months, as contents of a memo written by James Comey when he was FBI director surfaced, alleging that President Donald Trump asked him to drop an investigation of his former national security adviser.
Yet the decline turned out to be one of the biggest buying opportunities in a year as stocks rose for five straight days. Bolstering optimism was an earnings season where companies solidified a profit rebound that took first-quarter growth above 14 percent.
Speculation that political turmoil would prompt the Federal Reserve to slow its pace of monetary tightening also underpinned the equity recovery, according to Smith.
According to the minutes of the central bank’s last meeting released Wednesday, policy makers pointed toward a rate hike as soon as the meeting in mid-June, though they added the caveat that “it would be prudent” to wait for evidence that a recent slowdown in economic activity had been transitory. The central bank dropped the language pertaining to concerns over equity valuations and noted the bullish earnings forecasts from analysts.
“We’re in a win-win environment here,” Smith said. “If we get some degree of modest fiscal policy, that’d resolve in faster GDP growth and be celebrated by the market. If Trump gets paralyzed with investigations and can’t get any thing done, then we’re stuck in a 2 percent economy and in that case, the Fed would slow down even more the trajectory of rate hikes.”