- The Dow bled lower on Friday as the stock market struggled to break out to new highs.
- Donald Trump wants voters to believe the economy has roared back to life.
- Hedge funds are betting the opposite is true.
To hear Donald Trump tell it, the U.S. economy has formed a perfect “V” as it roars back from its worst quarter in history. Hedge funds aren’t so sure. Although the Dow Jones has staged a remarkable comeback, funds are increasingly betting the “reopen trade” is built on shifting sands.
Dow Struggles, Stock Market Balks at Setting New All-Time Highs
It doesn’t look like the stock market is going to set a new record this week after all. Despite briefly broaching a new zenith this week, the S&P 500 has failed to close at an all-time high. And with prices moving lower today, it seems like bulls might have to leave the champagne corked a little while longer.
As of 9:54 am ET, the Dow Jones Industrial Average (DJIA) had fallen 104.31 points or 0.37% to 27,792.42.
The S&P 500 fell by 0.15% to 3,368.5.
The Nasdaq – which appeared primed for a rally during the overnight futures session – slid too. The tech-heavy benchmark lost 0.22% to trade at 11,017.9.
Trump Touts Economic Boom – Hedge Funds Don’t Buy It
President Trump took to Twitter Thursday to peddle a series of charts created to hoodwink voters into believing the real economy is a lot brighter than the one they see outside their windows.
All of them featured back-slapping titles:
- U.S. Stocks Lead the World
- Manufacturing Boom in Full Swing
- Jobs Boom in Full Swing
- Shallowest Contraction
- Auto Market Shows Rapid Recovery
- Housing Market Quickly Rebounds
And V-shaped trend lines like this one:
It’s easy to lie with charts – there’s a whole book about it – and critics claimed that’s precisely what Trump was doing.
Of course, it’s one thing to answer a chart with a chart. It’s another to put your portfolio where your mouth is.
According to Bank of America research, that’s what hedge funds are doing.
Because hedge funds account for approximately 85% of all short interest in stocks, you can get a good idea of what fund managers think about the market by looking at what’s being heavily shorted.
There’s a prevailing theme among the most-shorted stocks in the S&P 500. They’re companies that really only offer upside if the economy reopens.
Five of the 20 most-shorted companies operate in the travel industry:
- American Airlines (29.5% short interest)
- Carnival (20.3%)
- Norwegian Cruise Line (18.7%)
- Royal Caribbean (11.5%)
- United Airlines (10.7%)
A variety of others – like Ralph Lauren (11.1%) and Kohl’s (14.7%) – rely heavily on a brick-and-mortar retail sector that got pummeled by the pandemic. (Data released this morning shows retail sales recovered more slowly than expected in July.)
What’s most jarring isn’t that hedge funds shorted airline and cruise stocks when the pandemic effectively shut down the global economy. It’s that they’re still shorting them so aggressively five months later. The Dow may have rocketed off its March lows, but travel stocks are trading more than 50% off their 2020 highs.
Trump can huff and puff about the economic “boom” all he wants. But if hedge funds are right, the “reopen trade” is about to go bust.
Last modified: September 23, 2020 2:24 PM