The U.S. stock market has rallied from its March lows following the coronavirus crash, but a recent survey shows investors are growing increasingly worried that it is just a bear market rally that will eventually head lower again (think W-shaped recovery).

Over two-thirds (68%) of respondents to Bank of America’s Fund Manager Survey for May categorized the 32% surge by the S&P 500 from its March 23 low as a “bear market rally,” which means even though the index has risen more than 20% off its recent low, it isn’t the start of a new bull market quite yet.

Banyan Hill Publishing’s Clint Lee is in the majority, and he thinks the Federal Reserve holds the keys.

Clint Lee ban stock buybacks historic job losses

Banyan Hill’s Clint Lee

“At this point I would say this is still a bear market rally,” said Lee, a Chartered Financial Analyst and Chartered Market Technician for The Bauman Letter and an expert in investor psychology.

“It’s just a matter of how long the Fed can instill confidence to chase the market higher. And that’s because there is a huge disconnect between the market and the economy. The S&P 500 is now down just 8% on the year, yet we’ve seen over 35 million people file for unemployment benefits.”

Lee argues that investor greed and fear of missing out (FOMO) on the Fed’s increased support in a variety of asset classes have fueled the recent surge.

“First there is certainly FOMO in this market,” Lee said. “That’s because investors have grown accustomed to market rallies when the Fed backs up the stimulus truck. And this time they’ve unleashed unlimited quantitative easing and are even purchasing riskier forms of debt to support the fixed income markets, but that also has an impact on stock prices. There’s been over $2 trillion in new money created in just the past two months.

“But these actions are also driving short- and long-term treasury yields to record low levels, meaning that TINA is back, which is ‘There Is No Alternative.’ That’s driving investors to stocks as well.”

The Dow Jones Industrial Average rocketed up 900 points Monday after Moderna Inc. revealed a breakthrough in its coronavirus vaccine testing, but all three indexes were relatively flat again Tuesday, and have struggled to break up or down for a significant period over the past month.

“The waffling in stock indexes over the last month is being driven by sector rotation under the hood,” Lee said. “Meaning that while the S&P 500 has moved sideways, you have large-cap tech stocks doing well and moving to new highs on the year while hard-hit sectors like industrials and financials remain down 20-30% on the year.

“This can be an incredibly frustrating time for investors. Because if you didn’t sell before that decline, now is your chance to get out. But you’ve also seen this powerful rally, so maybe you’re feeling good and optimistic again. It’s a constant tug-of-war between fear and greed.”

Investing During This Bear Market Rally

There is also a lot of uncertainty in the stock market while investors try to suss out what the economic recovery is going to look like as states across the country start reopening businesses.

Only 10% of the 223 fund managers polled by Bank of America are projecting a “V-shaped” economic recovery, where business quickly springs back into action and everyone who lost their job is able to find work again without trouble.

“It’s hard to see a V-shaped recovery at this point,” Lee said, “which is what the market would seem to be anticipating.”

The country isn’t out of the woods yet, and the biggest fear fund managers expressed was a resurgence of COVID-19 cases in the fall causing another economic shutdown that would likely send stocks into cratering again.

That doesn’t mean investors should sit on the sidelines during a bear market rally, though.

“There are still great opportunities out there,” Lee said. “There are stocks where long-term secular growth trends will continue to serve as a tailwind. And there are also great value opportunities in beaten up sectors. My colleague Ted Bauman recently wrote about cheap valuations in the housing sector. There are still many generational buying opportunities, even after this broad market rally off the lows.”