Daily Times

Signs of trepidation over the lasting impact of the US coronavirus pandemic are growing on Wall Street, fanned by resurgent case numbers, the prospect of a slower rebound in growth and rising political uncertainty.

As a US equity rally stalled this week, investors poured a net $24.5 billion into bonds, the third largest weekly inflows ever recorded, while pulling $3.8 billion out of stocks, according to BoFA Global Research. Gold drew its second largest inflows on record, while investors socked nearly $41 billion away in cash.

Meanwhile, the dollar hit its lowest level in nearly two years, weighed down in part by growth-chasing investors cutting positions in US assets in favor of allocations to Europe. In the bond market, yields on Treasury Inflation-Protected Securities (TIPS), which adjust for inflation – are near all-time lows.

“We are definitely concerned,” said Nick Maroutsos, Head of Global Bonds at Janus Henderson Investors. “I don’t think you can blindly buy assets. A lot of the value has been squeezed.”

Maroutsos said there was some “fear of missing out” in the market with the expectation that actions by the US Federal Reserve can continue to keep risk assets elevated, and that investors were “looking to hedge some of their portfolio given the move in risk assets”.

He added that behavior “can certainly continue.”

The US central bank has pledged unlimited financial asset purchases. While the vast majority of these purchases have been limited to US Treasuries and mortgage-backed securities, the Fed’s pledge to bolster the corporate bond market has spurred a frenzy for bonds and stocks.

The Fed’s July 28-29 meeting could describe the turn the economy seems to be approaching. The US economic outlook has darkened in the past month, according a Reuters poll.

Investors are weighing coronavirus cases escalating in southern and western US states, rising tensions between the US and China, potential volatility stemming from the Nov. 3 presidential election and the level of debt being built up to fight the effects of the virus. Jeffrey Gundlach, chief executive officer of Doubleline Capital, which oversees $138 billion invested primarily in fixed income, said he was concerned about the level of debt being built up in the economy via multiple stimulus programs over the years.

He believes that will weigh on the dollar as the US deficits grow. While the dollar may benefit short term if there is equity weakness, “ultimately it weakens as the debt situation is really remarkably bad for a developed country.”

There are also concerns that the blistering rally in the S&P 500 from its March lows has been led by a small group of technology-related names.