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There’s A Trap Ahead For The Market This Summer – Here’s What You Need To Know Now

There’s A Trap Ahead For The Market This Summer – Here’s What You Need To Know Now

Several experts have a warning smart investors may want to heed.

April saw the market’s best run since 1987 with the S&P 500 gaining 12.7%.

But now the question is, should you sell in May and go away?

One strategist in favor of just that is Nomura’s Charlie McElligott, who says the market is in for a rough ride over the next few months amid a deluge of bad economic and corporate news as the damage amid the coronavirus pandemic begins to become clearer.

“I think for retail investors who probably missed that rally last month are scratching their heads on why we rallied, the danger is now they try to chase, and think the rally has more legs from here, because much fo what the macro hedge fund space is really setting up for a move lower again,” said McElligott, Nomura’s managing director of cross-asset macro strategy. 

Those funds, instead, are now pouring their equity into safer corners of the market like gold. Meanwhile, the fear of missing out is playing a role in the market’s recent movements.

“The fear… of missing out, or another term for that traditionally has been greed, right? It is definitely playing a role in the current market,” said Morgan Stanley’s Investment Management head of global balanced risk control strategy, Andrew Harmstone.

In Harmstone’s view, investors are denying the “damage that’s actually been occurring to the global economy,” indicating that “people still think that things are going to go back to normal, or what they were recently, quite quickly.”

And that optimism is being fueled by the prospect of states lifting lockdowns and relaxing social distancing guidelines put in place to help curb the spread of COVID-19.

“I am actually quite surprised that people aren’t more worried about a second wave,” said Richard Bernstein, CEO and CIO of Richard Bernstein Advisors. “We’re opening up the economy at a point in time when certain states still have an accelerating number of cases. …How can you be enthusiastic with that backdrop?”

The real extent of the damage from the coronavirus shutdowns will soon become “visible,” Harmstone said, starting with “actual bankruptcies” or at least, downgrades of companies, which is likely to send the market reeling.

“We are now in the ‘already squeezed the reasons for optimism out of the toothpaste tube’ phase and into ‘the hard part 2.0,’” said Nomura’s McElligott, with the summer season likely to bring “hard economic data collapsing like we’ve never seen before, terrible corporate guidance, stories of pending bankruptcies,” and with a second wave of layoffs in the white-collar sector.

“That’s why I think folks are getting ready to hit the wall again, with this idea we’ve moved out of stabilization and now we’re back into the harsh reality of what this is,” without another boost from the Federal Reserve and no more stimulus checks until things get far worse than they are even now, McElligott added.

“We’re in totally uncharted territory,” Bernstein concluded. “None of us have ever seen a pandemic like this. None of us have ever seen an economic recovery post-pandemic.”

So what’s an investor to do? Harmstone, for one, says investors should keep their portfolio risk levels low and maintain a defensive position while also looking for opportunities to add value.

“It’s true that… by maintaining a defensive position you’re not capturing the full benefit of the rally, but remember, volatility is so high that even a defensive position still actually gives you a fair amount of upside just because the moves are so big,” Harmstone added, while cautioning that investors face the potential of overexposure to a “disproportionate amount of downside risk” if the recent relief rally ends.

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