Stock Market’s Weakest Links Dominate With Full-Throttle Fed

For proof the Fed’s largesse has been powerful in the stock market, look no further than how firms with the shakiest finances are faring.

Companies with weak balance sheets are beating those with sturdier accounts by over 20 percentage points so far this quarter, the biggest gap since at least 2006, according to data compiled by Goldman Sachs Group Inc. and Bloomberg. The list of firms with rickety credit includes Expedia Group Inc., Alaska Air Group Inc. and Carnival Corp. -- a group that doubles as the hardest hit by the coronavirus pandemic.

They are thriving now as vaccines find arms and the economy reopens. Supercharging their ascent is the Federal Reserve’s rock-bottom rates and monthly bond buys -- support the central bank intends to keep in place for a long time, perhaps even years, Chairman Jerome Powell said this week. Add another $1.9 trillion from the government, and investors have had no problem taking a chance on the market’s weakest links.

“A lot of these companies that were questionable going concerns are now viewed as survivors and the ones that might be able to, in the short-term, most benefit from the liquidity,” said David Donabedian, chief investment officer of CIBC Private Wealth Management. “There have been all kinds of support mechanisms for lower-quality companies. The Fed has absolutely wanted to create a more hospitable environment for investors to take credit risk, and they have.”

Stock Market’s Weakest Links Dominate With Full-Throttle Fed

Profitless companies have also been among the winners. A Goldman Sachs basket of tech firms that posted deficits in the last year is up almost 2% since the end of December, while Russell 3000 loss-makers have surged 25% this quarter, five times the index’s gain.

That companies with weak finances are rallying so strongly is just another manifestation of the rotation into value stocks, a move that was on display this week until an oil rout hit energy shares and a Fed change in reserve requirements hammered banks. The S&P 500 and the Nasdaq Composite both dropped 0.8%. The Dow Jones Industrial Average lost 0.5%.

Even with Friday’s bank selloff, the economically sensitive sectors like financials and industrials that dominate the Russell 1000 Value Index helped it outperform its growth counterpart for a sixth straight week as economists up and down Wall Street raised their 2021 growth forecasts.

“Things are only going to get better, the vaccinations are ahead of schedule, the stimulus is going to start to show up,” said Brian Nick, chief investment strategist at Nuveen, the investment arm of retirement-savings giant TIAA. “It’s going to benefit the cyclical areas.”

Fed policy makers at their meeting this week lifted their own estimates for gross domestic product and said they still intend to keep rates near zero through 2023. Powell further soothed markets by saying that it’s “not yet” time to even begin discussing curtailing the central bank’s bond buying.

As the federal aid sloshes into Americans’ pockets and the coffers of state and local governments, the companies with shaky finances that stand to benefit as the economy takes off can continue to surge in the stock market, according to Donabedian.

“They go from borderline to companies that can survive and thrive, and it certainly also plays into the idea that there was a more speculative element to the investment environment today,” Donabedian said. “The underlying source is liquidity.”

©2021 Bloomberg L.P.

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