Short Sellers Give Up as Stocks Run to New Records
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What is driving the episode about short sellers and market records?
This is Your Money Matters from The Wall Street Journal.
Welcome to Your Money Matters. I'm Jennifer Strong in New York. Times are tough for skeptics of the bull market and short sellers are starting to give up. Here in the studio with the story is The Wall Street Journal's Ben Eisen. Ben, if you would please start by explaining how short selling works.
Sure. It's basically like taking the other side of the market. So most people put money into the market thinking that it's going to go up. But if you think it's going to go down, you can basically bet against the market. And it kind of involves a process of what you do is you borrow shares and then you actually sell them and you hope to basically buy them back later after the stocks have fallen and you return them to the place that you borrowed them from. Then you collect the difference basically. So if stocks have fallen, you make a lot of money. If stocks rise, you lose a lot of money.
Yeah, making money is tougher to do when the S&P just keeps hitting record after record.
Yeah, absolutely. It's been a pretty torrid run this year. The S&P is up more than 10% this year. And it's a gain that a lot of people weren't really expecting, considering that a lot of the sort of fundamental things that usually drive stocks higher aren't necessarily in place, especially after such a long bull market that we've had all these years.
So folks are changing course, but to be clear here, they aren't so much changing their minds as just choosing to stop losing money.
Yeah, basically people aren't really giving up their views that stocks shouldn't be going up necessarily.
How does short selling work and why do investors borrow shares?
You have an economy that's pretty sluggish. You continue to get economic growth, but not at as fast a pace as people would like for the length of the recovery. You have some policies that people were hoping for in Washington that seem to be getting pushed further and further into the future. And stocks are already pretty expensive. So that combination doesn't necessarily inspire all that much bullishness on the market. But at the same time, the market just keeps going up. And when it does that, it's tough to bet against it.
So what are some of the stories you're hearing from folks?
Well, we've heard from folks who are just, you know, there's a lot of strategies that can basically go long or short and are more going long these days than going short. You know, we talked to one guy who actually got out of the short selling business kind of ahead of the bull market that we've seen. But he's no longer in the market as a hedge fund manager the way he was prior to the financial crisis. He shorts a handful of stocks for his own account, but he's not really focused on the broader market anymore. So another thing we're seeing is that people just keep piling money into equity funds, you know, measures of flows of money into stock funds. They're showing a lot of money going in for it being this latest stage of the bull market, just for how long the bull markets lasted.
And I think that kind of speaks to the fact that people are kind of starting to give into this rally a little bit. You've had a bull market that people call the most hated bull market ever, just because people keep thinking at any point now stocks are going to go down. But There's a term on Wall Street called capitulation that people are kind of finally giving into this rally. And maybe that's a little bit of what we're seeing here.
We're talking about short selling with Ben Eisen and you're listening to Your Money Matters from The Wall Street Journal. Thanks for listening, everyone. Ben, anything else you're going to have an eye on?
I mean, one thing that's interesting is that we have earnings reports starting to come in, and the flow of earnings season is going to be getting heavier and heavier over the next few weeks. And I think that it's one thing that people will look to in the stock market to see just how much more stocks can go, especially when people talk about the stock market starting to get expensive.
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