Investor anxiety turns to greed, driving risky market 'melt-up'

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Stocks, bonds and commodities are heading for their strongest simultaneous four-month rise ever, an advance in the teeth of an economic slowdown that some investors find as worrying as it is remarkable.

Through Thursday, the S&P 500 and S&P GSCI commodities index were each up more than 25% since the end of March, while the Bloomberg Barclays U.S. Aggregate Bond Index added more than 3% in that span. If the gains hold during the final week of July, this would be the first time that the gauges all rose that much in a four-month period, according to a Dow Jones Market Data analysis going back to 1976.

Despite a recent rise in coronavirus cases, faith in government and central-bank stimulus programs and hopes for vaccine development are propelling asset prices higher. The broad advance is forcing many investors who had been skeptical to pare back their cautious wagers and join the rally, giving it further fuel.

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Now, some analysts see recent signs of a “melt-up” in which investors are buying things simply because they are rising, with little regard for economic fundamentals or the mixed signals sent by assets including stocks and bonds rising together. Traders are riding the momentum in everything from large technology stocks like Apple Inc. to the precious metal silver.

Such powerful rises are a concern for analysts who worry that the investments will suddenly fall in tandem if trading patterns shift or the pandemic worsens, driving a broad market retreat. Memories remain fresh of a bruising March selloff during which investors sold stocks and dumped assets normally deemed havens as governments halted business and travel.

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But analysts say the recent climb could still last for longer than anticipated, with many investors flush with cash raised during the early-year turmoil now jumping on the bandwagon. The synchronous gains in stocks and assets considered safe like gold indicate that investors are amplifying bullish wagers while also paying more to hedge their bets.

“People are hopping on the train, and they’re also looking to get anything else in their portfolio for when the day of reckoning comes,” said Christopher Stanton, chief investment officer of Sunrise Capital Partners. Mr. Stanton is betting against the dollar, expecting Federal Reserve stimulus programs to continue weakening the currency, boosting investments from stocks to commodities that are priced in dollars.

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Still, he warned that uncertainty about government or central-bank policies could send markets into a tailspin, noting that November’s presidential election might spark such a reversal. Many investors fear presumptive Democratic nominee Joe Biden will raise corporate taxes if elected.

“In 90 days, all of a sudden, we could run into a brick wall,” he said.

Another factor worrying investors: A large share of the stock market’s gains has been concentrated in tech behemoths like Apple, Amazon.com Inc., Google parent Alphabet Inc. and Facebook Inc. that report earnings this week. Investors retreated from tech stocks late last week, dragging down major indexes.

The S&P 500 hit its highest level in five months on Wednesday before declining late in the week. It is about 5% below its February all-time high. Numerous other investments extended a weekslong climb, including commodities such as oil and corporate bonds.

Expectations that the Fed will keep rates near zero have kept the benchmark 10-year U.S. Treasury yield near its March record low. Yields fall as bond prices rise, and steady demand for bonds pushed investment-grade corporate bond yields to all-time lows last week.

Nela Richardson, an investment strategist at Edward Jones, said the firm recently reduced its cash holdings and increased positions in high-yield corporate bonds, citing the nonexistent returns from holding cash with rates near zero.

“We’re all in a low-yield environment,” she said.

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Markets continue to climb even with many large companies painting a murky picture of the economy, highlighting investors’ faith in further stimulus programs. Last week’s swings came after European Union leaders agreed on a more than $2 trillion spending package. Many investors are also hopeful that U.S. lawmakers will soon reach a deal on further coronavirus aid.

“You don’t want to fight the Fed, the world’s central banks or the world’s governments,” said Thomas Martin, senior portfolio manager at Globalt Investments. The firm’s investment in stocks is in line with the benchmark it tracks and it has been holding gold in its asset-allocation strategies.

Investors buy gold during times of uncertainty, and precious metals are also benefiting from the flood of money being used to prop up the world economy. Some analysts expect the stimulus to stoke inflation, eroding the purchasing power of paper money and making the metals more expensive. But even within metals, traders see signs that investors are flocking to the sector because prices are going up.

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Such moves often happen after the number of investors holding an asset declines, then money managers seek to catch up to a rising market. Investor positioning was recently depressed across asset classes following the early year market selloff. Now, investors are gradually increasing those positions, a trend that could continue supporting stocks, Deutsche Bank analysts said in a recent note.

Analysts say there still isn’t excessive optimism in markets generally, though highflying stocks like electric-auto maker Tesla Inc. are a concern for many.

“For a lot of people, it’s hard to look at a stock like [Tesla] that goes up and up and up and not feel like you’re missing out,” said Victoria Fernandez, chief market strategist at Crossmark Global Investments.

The firm has pared back its positions in some large tech companies that have risen sharply like Apple and Microsoft Corp., while increasing its holdings of cyclical stocks more tied to the economy such as JPMorgan Chase & Co.

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