US stocks tick higher as investors remain optimistic on the economic reopening

NYSE traders

US stocks edged higher Wednesday with stocks pegged to the economic reopening taking the lead. The Russell 2000 small-cap index climbed 2%, outperforming other US indexes. Meanwhile the Dow was nearly flat, a less-than-exciting way to celebrate its 125th birthday. Tesla gained over 3%, lifting the consumer cyclical sector higher.

Central bank officials signaled that inflationary pressures are temporary, soothing investor concerns that a policy change would come sooner than expected.

Fed Vice Chair Richard Clarida said on Tuesday it would be possible to discuss scaling back the pace of asset purchases, and that pricing pressure will prove to be “largely transitory.”

San Francisco Fed Bank President Mary Daly told CNBC on Tuesday economic progress looks encouraging, but it isn’t yet time to change policy.

“What we’ve seen is some really bright spots, some very encouraging news,” she said. “It gives me hope, and I am bullish for the future. But it’s too early to say that the job is done.”

Here’s where US indexes stood at the 4 p.m. ET close on tk:

Goldman Sachs said that US stocks now face “headwinds”after a 12-month rally, with rising bond yields, higher inflation and slower jobs growth set to weigh on equity prices as markets move into 2022 and beyond.

Frenzied meme-stock trading continued today. GameStop has surged over 35% the past two days, while AMC is up 49% since the start of the week. New rallies in the two stocks caused short sellers to lose $618 million on Tuesday alone.BlackBerry jumped as much as 12%Wednesday.

In more GameStop news, the video game retailer is building an NFT platform. It’s part of an ambitious plan to transform itself into the Amazon of gaming.

Societe Generale said commodity prices are at risk of a major reversal that could whipsaw investors positioning for rising inflation.

West Texas Intermediate crude gained as much as 0.5%, to $66.43 per barrel.Brent crude, oil’s international benchmark, rose 0.7%, to $69.17 per barrel, at intraday highs.

Gold slipped as much as 0.3%, to $1890.7 per ounce.

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Morgan Stanley says the ‘extraordinary outperformance’ of small caps is coming to an end and the sector will feel cost pressure as the economy reopens

FILE PHOTO: A sign is displayed on the Morgan Stanley building in New York U.S., July 16, 2018. REUTERS/Lucas Jackson/File Photo
FILE PHOTO: A sign is displayed on the Morgan Stanley building in New York

Small caps and cyclical stocks have outperformed during the recession, but their extraordinary run will end soon, Mike Wilson, chief US equity strategist, said on Morgan Stanley’s “Thoughts on the Market” podcast late on Monday.

Since last April, the Russell 2000 index of small-cap stocks has outperformed the S&P 500 and Nasdaq 100 by 50% and 40%, respectively, Wilson said.

Small caps are those stocks that have a total market capitalization of between $250 million and $2 billion. They are likely to be disproportionately impacted by growing cost pressures during economic recovery. These come from concerns about labor availability and supply-chain shortages and are highlighted in recent purchasing manager surveys.

The Russell 2000 is up by around 19% year to date and has gained over 110% in the last 12 months. The S&P 500 and the Nasdaq 100 have risen by 5.7% and 4.4%, respectively so far this year.

The index has been one of the best-performing worldwide in the last year. It has even outperformed the tech-heavy Nasdaq 100, which has gained 75%, thanks to triple-digit percentage gains in the likes of electric vehicle maker Tesla, or video call app Zoom.

Morgan Stanley has therefore downgraded small caps to reduce risk. “Now, we think that period of extraordinary outperformance and earnings revisions and valuation expansion may be coming to an end,” Wilson said.

The bank upgraded the sector last April based on the assumption that “we would experience a V-shape recovery in the economy, and the government subsidy of the unemployment cycle would accrue to the bottom line of corporations, especially small caps”.

Because small caps tend to be very closely linked to the real underlying economy, they gained far more than bigger-caps, which can often be more subject to the health of global trade, exchange rates and other external factors. With the bounceback from the depths of coronavirus-induced recession, small caps enjoyed an even bigger rally and that may be starting to level out, Wilson said.

“The equity market is doing exactly what it should be at this stage of the recovery” Wilson said. Market-based interest rates have shot up significantly since the start of the year, as investors price in the prospect of a rapid pickup in growth, which might mean some correction in equity valuations in 2021.

“This doesn’t mean smaller cap company stocks can’t work; however, the risk-reward at this point is no longer favorable,” Wilson said.

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Goldman Sachs: Biggest ‘short squeeze’ in 25 years caused hedge funds to ‘de-gross’ at fastest rate since 2009

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Goldman Sachs said the GameStop saga had hit the wider market, with hedge funds rapidly cutting their positions

The US stock market is witnessing the biggest “short squeeze” in 25 years, forcing hedge funds to withdraw from their positions on stocks at the fastest rate since 2009, according to Goldman Sachs.

Last month saw GameStop shares rise more than 1,700%, “squeezing” hedge funds and others who had “shorted” the stock, costing them billions of dollars. A short position is a bet that a share price will fall.

The surge in GameStop and other heavily shorted stocks was driven by users of the Reddit forum Wall Street Bets, who forced up the price in an effort to make themselves money but also to hammer hedge funds such as Melvin Capital.

Read More: A chief investment strategist breaks down how the GameStop saga could upend long-standing practices on Wall Street – and shares her 4-part advice for navigating the frenzied trading environment

Goldman Sachs analysts this weekend shed some light on the situation in a note. “The past 25 years have witnessed a number of sharp short squeezes in the US equity market, but none as extreme as has occurred recently,” they said.

The equity analysts said a basket of the most-shorted US stocks has rallied 98% in the last three months. Estimates by data provider Ortex on Friday showed that short-sellers were sitting on losses of around $19 billion just on GameStop in 2021 so far.

Hedge funds and short-sellers who had made losing bets were forced to withdraw from the market rapidly at the fastest pace since 2009, in what is known as “de-grossing”.

They had to buy shares in companies such as GameStop and movie theater chain AMC to close their short positions, and sell other stocks to cover their losses.

“This week represented the largest active hedge fund de-grossing since February 2009,” Goldman analysts including David Kostin and Ben Snider said. “Funds in their coverage sold long positions and covered shorts in every sector.”

Kostin and his colleagues said regulations, limits put in place by trading platforms, or sharp losses could bring the amateur trading frenzy to a halt.

“Otherwise, an abundance of US household cash should continue to fuel the trading boom,” they said.

Read More: As Redditors flood the stock market, UBS breaks down 6 options strategies investors can use right now to protect their portfolios 

Goldman said retail investing was thriving because of the large amount of savings built up during the coronavirus period, as well as government stimulus.

“During 2020 credit card debt declined by more than 10%, checking deposits grew by $4 trillion, and savings grew by $5 trillion,” the investment bank’s analysts said.

“On top of these savings, our economists expect more than $1 trillion in additional fiscal support in coming months, including another round of direct checks.”

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