Stock Rally That Nobody Saw Coming Is Refusing to Go Quietly

(Bloomberg) — Hedge funds distrust it, a clutch of strategists say it’s doomed, and the Federal Reserve probably wishes it would stop. But a fearsome stock market rally that has been giving prognosticators fits is refusing to go away.

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A final-hour surge Friday salvaged a third straight up week for the S&P 500 — barely — extending a run for U.S. equities that at times has ranked among the strongest in the past decade. The benchmark gauge has retraced well over half its tumble since the start of the year, a shock to institutional traders who spent most of the last three months slashing risk.

“A lot of people sold on the way down and then this quick surge, they’ve missed out on it,” Craig Callahan, chief executive officer at Icon Advisers Inc., said by phone. “So I think they’re trying to discredit it, sort of saying, ‘well I didn’t get in on it, it must not be real.’”

The case for skepticism remains an easy one to make. Besides war in Europe, this week’s jobs and inflation data reinforced the argument for a faster Fed tightening cycle. The bond market is flashing warnings over an economic recession. And the earnings-reporting season due to start in two weeks is expected to show a drastic slowdown in corporate profits.

Among investors surprised when the S&P 500 jumped more than 10% over 11 sessions through Tuesday were hedge funds. Those tracked by Goldman Sachs Group Inc. unwound their risky bets — cutting longs and covering shorts — in 15 of the first 21 trading sessions of March. By Tuesday, the dollar amount of their de-risking was poised for the second-largest monthly reduction in five years — behind only the Reddit-fueled short squeeze in January 2021, according to data from the firm’s prime broker.

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The pattern was echoed at JPMorgan Chase & Co., whose hedge fund clients also sold into the latest rally.

“We’ve just seen a very sharp rebound in equities that seems to have caught many by surprise, and which few seem willing to embrace as a potentially persisting trend,” JPMorgan analysts…


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