Wall Street Bulls Lashed by Worst Stock Volatility Since 2011

(Bloomberg) -- This fickle stock market is lashing any brave souls left on Wall Street with bullish conviction.

As the spreading virus spurs a renewed Federal Reserve put, American stocks haven’t jumped around like this since the euro crisis of 2011. Ferocious reversals show a market torn between V-shaped economic recovery bets and recession angst.

Bulls look like geniuses one day, dumb the next.

Stocks kicked off the week surging on hopes of monetary action to cushion the blow from the virus. They slumped when it landed. They rallied when Congress authorized billions to fight the outbreak. They’ve just tanked in Thursday trading after California’s state of emergency due to the pathogen.

No wonder so many investors are sitting it all out.

Just ask Gregory Perdon, who’s looking for more policy action like fiscal stimulus.

“The next decision we have to make is whether we want to take a more bullish stance,” said the co-chief investment officer at Arbuthnot Latham & Co. Ltd. “That decision has not been made as of yet.”

The S&P 500 Index tumbled 2.8% on Tuesday when the Federal Reserve slashed interest rates by 50 basis points in the first emergency cut in a decade. The feeling was policy makers had panicked, or knew something investors didn’t about the impact of the virus.

“In order to get me to embrace risk again, I need something that’s unexpected,” Perdon added.

Congress passing a $7.8 billion emergency spending bill to fund the government’s response to the outbreak certainly seemed to qualify for many investors. American stocks surged by more than 4% for the second time in three days Wednesday.

Bull Case

This volatility isn’t good for market health. But there remains a valuation case. Under the so-called Fed model for valuing equities, which compares their earnings yield with Treasury yields, shares are looking near the most attractive versus debt since 2016.

If you hate the simplicity of the argument, focus instead on the still-resilient market backdrop. Bank liquidity is stable. There’s no sign of mass defaults yet. It’s dirt cheap to refinance and launch buybacks. Policy makers can always help out vulnerable sectors like travel and industrial, mitigating solvency and liquidity risk to others.

Credit markets are picking up as cash pours into exchange-traded funds while primary markets have reopened.

“In the medium-term to me it’s a game changer,” Francois Savary, chief investment officer at Prime Partners SA, said about the Fed cut. “Down the road it is essential that you get the markets liquidity because the reaction of the Fed is linked to the fact that the financial conditions index was deteriorating quite steeply.”

Geneva-based Savary said Prime Partner’s equity allocation remains “on the defensive side” but the company removed downside protection after the plunge last week.

Hold Fire

Lower funding costs should be a boon to companies with weak balance sheets, whose shares have been among the hardest hit by recent selling. They’re trading at the largest discount versus their opposite bucket since at least 2008, Goldman Sachs indexes show. No shortage of quants would tell you value stocks are the cheapest versus growth shares since the dot-com bubble.

But a landscape littered with newly cheap opportunities across assets isn’t yet enough to lure everyone back.

Amundi, a giant of European asset management, says it’s not time to jump headlong into risk just yet, and it too sees an increased likelihood of broad-based fiscal stimulus.

“The Fed’s action just offset the recent tightening in financial conditions,” analysts including Christine Todd wrote in a note on credit this week. “Given high levels of uncertainty, investors should be patient and selective in exploiting entry points.”

The total number of coronavirus cases globally is edging closer to 100,000 and the OECD this week warned that global growth will sink to levels not seen in more than a decade.

All that will take its toll. Earnings revisions turned the most negative since October as of Friday. JPMorgan Chase & Co’s recession risk tracker still puts the odds of a U.S. downturn within one year at around 35%.

“Leveraged corporates are vulnerable here so we would need to see stimulus measures in place to protect them before getting more positive too,” said Nick Wall, a portfolio manager at Merian Global Investors. “In short, the checklist for getting more bullish looks better but, given the size of tail risk, we need to be very confident that the risk-reward is there.”

To contact the reporters on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net;Justina Lee in London at jlee1489@bloomberg.net

To contact the editors responsible for this story: Sam Potter at spotter33@bloomberg.net, Sid Verma

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