Wall Street isn’t just in a bull market, it’s in an “epic” one.
That is according to Morgan Stanley, which on Tuesday wrote that the equity market rally “has reached epic proportions.”
“We say this not as hyperbole, but based on a quantitative perspective,” the investment bank explained. “Dispersions in valuations and growth rates are among the lowest in the last 40 years; stocks are at their most idiosyncratic since 2001; and equity hedge fund beta is at its highest since March 2008.”
Simply from the perspective of price moves, the “epicness” of recent trading activity should come as no surprise to investors. The Dow DJIA, +0.31% S&P 500SPX, +0.23% Nasdaq COMP, +0.11% and Russell 2000 RUT, +0.30% have all hit repeated records this year alone, notching dozens of all-time highs. Those gains have been widespread and “perpetual,” to use Morgan Stanley’s description. Only two of the 11 primary S&P 500 sectors are in negative territory for the year, and for broader indexes, even mild pullbacks of 3% have basically been nonexistent for months. Volatility is near record lows. Beta refers to a measure of an assets tendency to fluctuate compared against a benchmark like the S&P 500.
Other regions have also reported strong gains: European equities are up more than 20% this year, as are emerging markets. Basically every country—as gauged by the most popular single-country exchange-traded funds—is positive on the year.
The move higher hasn’t been without controversy, given concerns over valuations, the pace of global economic growth, political uncertainty, and questions over the effect of the Federal Reserve’s effort to unwind its balance sheet and increase the cost of borrowing.
However, the relentless march higher has defied bears, who argue that the too-lofty valuations aren’t supported by fundamentals, and emboldened bulls.
“While investors have at times appeared reluctant to embrace the recent rally, there is evidence from last month that risk appetites are increasing,” Morgan Stanley wrote.
The investment bank noted that cyclical sectors, which are more closely correlated to the pace of economic growth, have been outperforming defensive ones, just as small-capitalization stocks have outperforming larger companies.
“Momentum is now strongly correlated with high beta globally, and the presence of this cohort of investors could produce continued risk-seeking behavior,” wrote the team of analysts, led by Brian Hayes, an equity strategist.