As for being quick, the so-called fast money has so far been anything but. Hedge funds pursuing long-short equity strategies came into January with bearish positions toward the S&P 500, judging by the portion of their returns attributable to the benchmark, a measure known as beta.
There are grounds for optimism, however. Positioning has since recovered to levels consistent with a 60:40 equity and bond allocation, Nikolaos Panigirtzoglou, a strategist at JPMorgan Chase & Co. said in a note on January 25. That suggests there could be more upside for U.S. stocks as hedge funds finally join the rally.
Just as the stock rebound from December’s lows appeared to run out of steam, Fed Chairman Jerome Powell this week scaled back tightening expectations even further than already anticipated. A dovish turn by the central bank in December helped ease financial conditions and has been key to the return of risk appetite -- after Powell spoke on Wednesday, the S&P 500 closed 1.6 percent higher. It added 1.6 percent in the week and closed Friday at the highest level since November.
Meanwhile, volatility gauges across currencies, stocks and bonds suggest a new period of tranquility may be emerging as option traders shake off December’s wild swings. The Cboe Volatility Index for stocks, known as the VIX, is back around its 200-day average. The MOVE Index, the equivalent gauge for Treasuries, this week hit the lowest since October.
Muted gyrations should help offset some of the lingering fears out there, such as concern about the trade war.
Even the dash for the safety of cash and short-dated government notes shows signs of ebbing. An iShares fund that invests in Treasuries with one- to three-year maturities saw $535 million pulled out in January, the first monthly outflow since July.
And remember how value shares performed? Quantitative investing styles following the strategy also gained, alongside those tracking growth stocks. More defensive factors, such as those based on profitability or dividend yields, have lagged.
But the value investing style’s outperformance of a factor like momentum also happens to be a typical late-cycle dynamic -- one of a slew of reasons for caution.
Even after earnings expectations were slashed, there have been disappointments from bellwether companies such as Caterpillar and Nvidia. The Fed message this week was more dovish than many expected, yet U.S. stocks showed a measured response overall -- a hint that the rally may need a different catalyst if it’s to continue.
A defensive picture was also on show in equity-focused ETFs, where quality and low volatility products attracted $4.6 billion between them in January.