But in conversations with clients over the last week, Goldman Sachs’ equity strategy team found investors “uniformly” citing three factors as driving this market higher.
“From a diagnostic perspective, investors uniformly cite the same three drivers of the rally,” Goldman’s team led by David Kostin said in a note published over the weekend. “The slowdown in the rate of new virus infections, the series of dramatic Fed policy actions, and the CARES Act.”
The firm also notes that, “Investors expect a fourth round of fiscal stimulus (“Cares 2.0”) will be enacted.” In recent weeks we’ve seen some strategists offer six reasons why stocks have moved higher. Others see the move as a bet on one of two extreme outcomes — a record-short recession or the Fed buying equities. Still other strategists believe the move represents a fairly balanced view about what might happen next.
According to Kostin’s note, the Fed’s actions, the virus’ slowdown, and the checks sent to Americans are more than enough for this rally to keep going.
What Kostin’s note highlights, however, is yet another inversion of how investors tend to understand market opportunities, another subtle shift in the baseline approach of most market participants. Because what investors see as reasons for the market’s rally are the things we can know right now, not the unknowns that often serve as the sources of return.
At the simplest level, stock market investors are betting on the future. The future, of course, is necessarily an unknown. Every model of what could happen to the value of a stock or an index or a sector is ultimately based on an assumption — a guess — about what the future of that business or industry holds.
If we venture back in time a year or two or three, what the market reacted to at various points were expectations that corporate taxes would be cut, fears that a Fed rate hiking cycle would lead to recession, and hope that a U.S.-China trade accord would ultimately be reached.
The risk investors assume in making these guesses are the source of the equity market’s excess return over time. But right now, the main thesis backing up the market’s rally is less about what isn’t known but about what is.
Now, the focus on concrete actions from the Fed, from Congress, and from health authorities doesn’t mean that everything has changed in terms of investors looking ahead.
After all, the market is largely looking past a current reporting period that has seen earnings drop 14% from last year while second quarter earnings are expected to drop 40%, according to data from Credit Suisse. Big assumptions about future earnings are embedded in decisions to ignore the current quarter’s precipitous decline.
And according to Morgan Stanley’s Mike Wilson, investors are also betting increasingly on a “V-shaped” recovery, the most ambitious of all potential economic paths forward.
“Our client conversations have changed dramatically over the past month, shifting from whether we will have a re-test of the March lows to what does the shape of a recovery look like,” Wilson wrote in a note published Monday.
“Our view is that we will see a sustainable V-shaped recovery,” Wilson adds, “primarily because history tells us this is the way it always looks and feels in a recession — a highly uncertain recovery path, pessimistic investors, and volatile asset markets reacting to daily updates about the exogenous shock that got us here in the first place.”
And for some investors, this view is probably more than enough to stay bullish.
