Short People: the market rebound, and what comes next

At 8 am on December 26th, we sent out a “Bear Market Barometer” that highlighted how stock and bond valuations had fallen well below median vs history, and that in the past, markets typically rallied after such sudden declines.  We wrote that investor pessimism was priced in, and that late December prices offered good value for long-term investors, particularly given the surge in “fast money” accounts shorting equities in the days before Christmas in very thin markets.  As you can see in the first chart (based on data from our Prime Brokerage business), as the shorts have been covering, equities rebounded quickly; more quickly, in fact, than after any prior post-war bear market.  The second chart reinforces the lack of any “real money” participation in the rally so far, which is remarkable.  The third chart illustrates how stock and corporate bond valuations are now around median, following the highs and lows of 2018.

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