• The market action over the past few weeks in the face of grim economic numbers and uncertainty about the future can be called a “pseudo-bullish rally,” said Sebastien Page, the head of global multi-asset at T. Rowe Price.
  • He told Business Insider how the firm’s asset-allocation committee is investing to both benefit from the recovery and be insulated from the uncertainty ahead.
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The stock market is flying higher in the face of economic numbers that paint a grim reality.

But investors are still pricing in a fairly pessimistic scenario for the future in some respects, said Sebastien Page, the head of global multi-asset at T. Rowe Price, where he oversees $300 billion. He is hard-pressed to find anyone who believes that business as usual will resume at the flip of a light switch.

Beyond this anecdotal observation, he notes that the composition of market leaders and laggards in this rally — about 25% from recent lows for the S&P 500 —  has not matched what a typical V-shaped recovery would look like. He characterizes this as a “pseudo-bullish rally.”

He has found that on days when news about drug treatments for the coronavirus emerges, small-cap stocks that are more exposed to economic swings do better than their larger brethren. But the opposite trend is in place the rest of the time.

Also, value stocks that are cheap and tend to be cyclical have selectively outperformed their peers with high earnings-growth expectations amid positive newsflow. The relative performance of two exchange-traded funds since the market low on March 23 illustrate their gap in this recovery: the iShares S&P 500 Growth ETF is up 32%, while its value equivalent is lagging at 27%.

“When people get positively surprised about the past, you get more cyclicality in terms of style, value versus growth, and size, small versus large,” Page told Business Insider. “That’s what a real cyclical upswing would look like, which typically occurs in the early stages of a market recovery. And that’s not really what’s happening.”

There are good reasons for these disconnects even if they do not make the market action any less jarring.

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Consider that many of the growth stocks that would normally be cast aside in the early stages of a recovery are better insulated from this crisis. For example, many of the large-cap tech companies have become more essential for remote work and communication. Their recent first-quarter earnings results proved just as much and helped turn the Nasdaq 100 positive for the year. 

Perhaps the biggest explanation for the pseudo-bullish rally is the trillions of stimulus dollars that the Federal Reserve has injected into the economy. The stimulus has swelled its balance sheet to a record $6.7 trillion and by 60% year-to-date. Surely, its swift actions have given investors confidence that many well-run companies will survive the crisis.

Still, Page worries that investors face a slow and uncertain economic recovery ahead. He noted that even if more states ease lockdown measures, businesses will not return to full capacity immediately.

Investing for the slog ahead

The fact that stocks have rebounded despite these concerns bolsters the case for staying invested and diversified for the long term, he said.

The asset-allocation committee he oversees uses a 6-18 month horizon to make tactical decisions. Page shared the following four moves they have recently made to benefit from the recovery and be positioned for an uncertain road ahead:

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1. They remain overweight US stocks relative to bonds. However, they have sold some positions during the rally due to the uncertain nature of the recovery.

2. Should the recovery surprise their expectations, Page’s team is keeping its options open via an overweight in small-cap stocks. They are relatively cheaper than larger companies and would benefit from a cyclical rebound because they are more exposed to the domestic economy.

3. Page’s team has shifted assets from non-US stocks towards the US because of the sheer size of stimulus that the government is making available.

4. They are slightly overweight growth stocks because the large tech giants continue to benefit from remote work.