U.S. economic data are crumbling as increasing coronavirus cases keep consumers at home and force more cities and states to restrict commerce, but the stock market has continued to rise.
- And bullish fund managers are starting to lay down bets that it will be this way for a while.
What's happening: "The reason is: You have monetary and fiscal policy pushing the economy out of a problem and that is very, very bullish," Andrew Slimmon, senior portfolio manager at Morgan Stanley Investment Management, tells Axios.
- "When you have these extreme accommodative policies it is because there is a problem in the economy. Investors historically focus on the problem and are cautious, yet that’s when you want to get most optimistic."
The big picture: It isn't just U.S. equity prices jumping — copper prices are closing in on their highest levels since the coronavirus pandemic began, the dollar is falling against the euro and traditional risk-on plays like the Australian and New Zealand dollars, and Brent crude oil is up 5% so far this month, having gained 95% over the last three.
Between the lines: Investors are counting on Congress to pass a new $1 trillion-plus coronavirus relief bill later this month and are confident the Fed will continue to carpet bomb markets with liquidity through its unlimited quantitative easing and corporate bond-buying programs should stock prices fall.
- While the U.S. remains "in the throes of the pandemic," expansionary monetary and fiscal policy is providing "a potential Goldilocks moment for investors,” Seema Shah, chief strategist at Principal Global Investors, said in a note to clients.
- Bank of America on Tuesday recommended investment-grade bond buyers take on bottom-of-the-index BBB-rated bonds and even suggests "some out-of-index exposure to BBs."
Yes, but: Many investors warn of various canaries in the coal mine.
- The extreme imbalance on the stock market has pushed the Nasdaq to its greatest advantage over the S&P 500 since before the dot-com bubble burst and the Nasdaq's price-to-earnings and price-to-sales ratios are at the highest since then as well.
- The Cboe's volatility index, despite the consistent gains, is about 41% above its historic average and double its February low.
The last word: "Next year when governments are not responding and the problem’s behind us, I suspect that the level of optimism will grow but that’s actually a less attractive time to be in equities," Morgan Stanley's Slimmon says.
- "You’ve seen this movie before; it always ends this way."