As 2023 came to a close, Wall Street fretted over looming financial risks, but 2024 ushered in a speculative frenzy. Technology stocks and Bitcoin surged, while credit markets saw historic activity. Amid inflation fears, a robot advisor taps into crypto for retail investing. Despite warnings of bubbles, markets soared on consumer spending and corporate resilience. Yet, concerns linger as investors brace for potential shifts in sentiment and Fed policy.
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By Lu Wang, Jessica Menton, Olivia Raimonde and Muyao Shen
In the telling of Wall Street worrywarts, as 2023 drew to a close, the biggest financial markets on the planet were heading into the danger zone.
After a ferocious fourth-quarter rally, the fate of the S&P 500 rested on just seven companies with doubtful earnings prospects. Infamous hedge-fund trades were threatening to destabilize the already unstable Treasury market. Trillions of dollars in debt were coming due while consumers were running out of pandemic-era savings fast.
More than three months later, what’s kicking off instead is a fresh bout of speculative euphoria. While the S&P 500 just ended the week a few points lower, historic advances in technology stocks and Bitcoin have been raging of late alongside some of the briskest credit business in decades. With the US economy expanding at a healthy clip, a Bloomberg-compiled portfolio tracking equities, Treasuries and corporate debt is poised for its best five-month performance since 2016.
In a sign of the times, a robot-powered financial adviser is opening up the buzzy world of private-credit investing to the retail crowd funded by newfangled crypto.
The last few years of gravity-defying markets have proved unkind to the pundit class. Yet a small but growing cohort is vocalizing fears that bubbles will get exposed soon enough with fresh inflation fears threatening to delay the Federal Reserve’s great monetary pivot.
“It’s like being high on drugs. The markets take the best from the AI story, the best from the disinflation story, the best from the growth story and project that forever,” said Vincent Deluard, director of global macro strategy at StoneX. “You’ve had all these warnings about, ‘oh, things are getting dicey here and the stock market is too expensive.’ And what you see under the hood is the same stocks going up every day.”
Rather than contracting, the economy has been chugging along, bolstered by consumers whose financial firepower has been boosted by an uptick in inflation-adjusted incomes and gains in asset prices. Perhaps it’s no coincidence that the S&P 500’s latest leg up began in October — just when economists started to ratchet up their 2024 forecasts for US household consumption.
Adding to investor confidence is corporate resilience. Demand for technology innovations like artificial intelligence has propelled profits back to expansion mode, while the terming out of debt during the low-rate era has allowed large firms to weather the most aggressive monetary tightening in decades.
That, at least, is the broad rationale for the enduring market boom. In the equity market, hedge funds keep piling into the best performers such as Nvidia Corp. Momentum shares now comprise the largest-ever portion of their long positions since at least 2007, according to data from Morgan Stanley’s prime brokerage unit.
While the bet is paying off handsomely for now, the crowding has JPMorgan Chase & Co. warning that a “momentum crash” is coming should sentiment shift over the economy or AI.
Small-fry traders aren’t fussed. They’re flocking to bullish options, spending more money on calls than bearish puts at a rate not seen since the 2021 meme-stock era, data compiled by Sundial Capital Research show.
“The return of the YOLO was not on my February bingo card,” said Scott Rubner, a managing director at Goldman Sachs Group Inc., referring to the “you only live once” acronym that’s often associated with the gambling retail crowd. “I need to wake up every morning to see what stock can rally 50% by Friday.”
The S&P 500 on Tuesday scored its 17th all-time high of the year before retreating. Thanks to faster profit growth, the index’s price-earnings multiple has shrunk by about two points from where it was at the previous peak in 2022.
Read more: Bitcoin’s 2024 supply shock: What impact will the Halving have on the crypto market?
Shares of AI darling Nvidia are traded at 36 times earnings, compared with a multiple of 130 fetched by an old poster-child of the dot-com frenzy, Cisco Systems Inc., back then. To Jeremy Siegel, a finance professor at University of Pennsylvania who’s famed for dubbing tech shares a “sucker’s bet” in March 2000, the valuation gap is why today’s bubble warnings are overblown.
“We’re not in a bubble. The word is way overused,” Siegel said. “I don’t see red flags.”
Not everyone is sitting comfortably, with economic data this week rekindling inflation fears. Bank of America Corp.’s chief investment strategist Michael Hartnett warned that characteristics of a bubble are forming in the so-called Magnificent Seven stocks and across the world of crypto, citing the pace of their price appreciations among other things.
In the week through Wednesday, investors poured in a record amount of fresh money into US stock funds and those tracking cryptocurrencies, according to data compiled from BofA.
One reason why investors are feeling free to bid risky assets of all stripes: Wall Street at large has now made peace with Treasury yields at still-elevated levels. Despite a week of mild bond drama, volatility has plunged from the highs unleashed during the inflation-driven bear market — when pangs of yield-driven stress rocked the cross-asset trading landscape.
The so-called ICE BofA MOVE Index, which tracks expected turbulence in US bonds via options on interest-rate swaps, now sits near levels last seen before the US central bank kicked off its policy-tightening campaign in 2022. And the Treasury basis trade, a bond-market strategy that has drawn the scrutiny of regulators, is dwindling.
With a sense of relative stability returning to the world’s benchmark for borrowing costs, the jovial days of the easy-money era are back in credit. Frenzied retail traders, insurance funds and pension managers are absorbing historic volumes of debt supply. The average cost to insure bonds against default hit the lowest since 2021 this past week.
The gap between the riskiest investment-grade debt and the safest junk obligations recently compressed to the tightest in two years, signaling waning concern about defaults in the speculative-grade market.
“The go-go days of zero lower bound had the market taking shots of risk and banking on your friend (the Fed) to get you home safely,” said Scott Kimball at Loop Capital Asset Management. “It’s the exact opposite scenario today. There’s yield, growth and your wingman sobered you up.”
The exuberance is spreading across the globe. Even as China’s woes undercut the emerging market story, sovereign risk premiums have fallen while the carry trade is roaring back. Banks are back selling AT1 bonds — the type of securities wiped out in Credit Suisse’s collapse a year ago — and being met with strong demand.
And while it’s not quite like the FTX-famous days of stay-at-home trading, get-rich-quick schemes are back in crypto. Old favorites such as Dogecoin are outperforming even Bitcoin, which itself soared at one point a sizzling 70% this year with the arrival of new exchange-traded funds. Pepe, a frog-themed coin, and Dogwifhat — yes, literally a dog pictured wearing a hat — have been racking up fresh highs almost daily.
“There’s definitely a lot of renewed optimism and new entrants are finally starting to turn up in pockets like memecoins,” said Zaheer Ebtikar at crypto fund Split Capital. “But there is generally still a looming air of uncertainty of how much longer prices can remain this high and how much leverage can exist in the market, especially for the riskiest of assets in memecoins.”
The euphoria has helped to lift the shares of so-called crypto companies such as Bitcoin proxy MicroStrategy and Coinbase Global, the largest US crypto exchange. With the stocks of each surging, the companies are raising billions of dollars through the sale of convertible notes.
While the retail-speculation-complex is exerting its presence from crypto to stocks, the relentless rally in popular names is showing signs of fatigue. The Nasdaq 100 fell for a second week, halting a four-month, 27% surge, while Bitcoin pulled back after breaking $73,000 for the first time earlier this week.
Traders will watch the Fed’s policy announcement next week to gauge the pace of upcoming interest-rate cuts. With equity exposure among the long-only institutional crowd jumping to post-pandemic highs, such positioning is likely to make the market vulnerable to negative surprises, according to Venu Krishna, head of US equity strategy at Barclays Plc.
“Should something go wrong, that means there is more to sell, which is a concern,” he said.
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© 2024 Bloomberg L.P.
