Bearish Bets Against Markets Are Surging

Investors are wagering that the recent pain in markets will intensify.

Stocks dropped sharply in another wild session Tuesday after Russia deployed troops into two breakaway areas of Ukraine, escalating tensions in the region. The S&P 500 ended the day down 1%, extending the losses from its January record to more than 10% and meeting the criteria of a market correction. The index hadn’t suffered a similar decline since February 2020.

Short sellers have been adding to their positions against the SPDR S&P 500 Exchange-Traded Fund Trust, which tracks the broad U.S. stock index, at the fastest rate in nearly a year. Other investors are scooping up at record pace options contracts that would pay out if the recent declines in the stock and bond markets worsen.

The escalating geopolitical tensions come at a time when a surge in inflation and uncertainty about the pace of the Federal Reserve’s expected interest-rate increases have already whipsawed financial markets to start the year. Earnings growth, meanwhile, is expected to moderate from its red-hot pace in 2021, when profits were being compared with their knocked-down levels during the early stages of the pandemic.

The S&P 500 is down 9.7% in 2022, while the tech-heavy Nasdaq Composite has tumbled 14%. In the bond market, benchmark borrowing costs rose above 2% earlier this month for the first time since mid-2019.

“Sentiment is really poor,” said Danny Kirsch, head of options at Piper Sandler, who said he has noticed more clients opting for hedges recently. “People are nervous.”

Short sellers added $8.6 billion to their positions against the SPDR S&P 500 ETF Trust over the four weeks through Thursday, according to projections from technology and data analytics company S3 Partners. That amount would be the highest since a four-week period ending in early March 2021.

Short sellers borrow shares and sell them, with a plan to repurchase them at lower prices and pocket the difference. Investors shorting the market may be placing an outright bet that stocks will fall or reducing their exposure to a market downturn while betting that particular stocks will outperform.

Jordan Kahn, chief investment officer at ACM Funds, said his firm has been trimming its positions in stocks in one of its strategies while adding to short positions against exchange-traded funds that track the broad market.

Mr. Kahn said he grew concerned near the end of 2021 when he saw that individual stocks were selling off, while the largest stocks kept major indexes afloat.

“That’s kind of a red flag for us,” he said. “We think that the most likely scenario is that those big stocks that haven’t had as big a correction yet will probably at some point play catch-up to the downside.”

Investors are loading up their bets against a number of big tech stocks that led the way higher in recent years, positioning for a reversal. Investors added $1.3 billion to their short positions against Tesla Inc. over the 30 days through Friday and almost $844 million to their bets against Nvidia Corp., according to S3 Partners. They have been trimming their bets, by contrast, against Bank of America Corp., Apple Inc. and Texas Instruments Inc.

Nvidia shares have fallen 20% in 2022 but are still up 63% over the past year. Tesla is down 22% this year but is up 15% from a year ago. Both stocks have skyrocketed since the end of 2019.

Many traders have stepped in to buy the stock market dips, despite the volatility. However, traders have also been tapping other options strategies to profit from the downturn or hedge their portfolios. Three out of five of the most active days for put options trading in history have occurred in the first weeks of 2022, according to Cboe Global Markets data as of Friday.

Call options on single stocks as a percentage of total options activity recently fell to the lowest level since April 2020, when the Covid-19 pandemic was first spreading through the U.S., according to Goldman Sachs Group Inc.

For much of last year, turbocharged bullish bets on stocks were in vogue, and many traders rode the S&P 500’s ascent to 70 fresh highs.

Calls give the right to buy shares at a later time, by a stated date. Puts confer the right to sell.

Investors are also hedging against potential declines in the bond market. The prospect of higher interest rates has triggered a rush out of bonds, with outflows from money-market and bond funds on pace to be the biggest in at least seven years.

The number of put options outstanding tied to the iShares iBoxx $ High Yield Corporate Bond ETF, which goes by the ticker HYG, and iShares iBoxx $ Investment Grade Corporate Bond ETF, or LQD, recently jumped to the highest level on record, according to Barclays PLC.

To some traders, the dour sentiment can be an opportunity to capitalize on any rebound.

Julien Stouff, founder of hedge-fund firm Stouff Capital in Geneva, Switzerland, said he placed short-term bullish bets on stocks in January around the time he noticed many traders growing more pessimistic on the market. Recently, he has taken a neutral stance through the options market.

“This fear normally creates a buying opportunity,” he said.

First, the good news for office landlords: A post-Labor Day bump nudged return-to-office rates in mid-September to their highest level since the onset of the pandemic.

Now the bad: Office attendance in big cities is still barely half of what it was in 2019, and company get-tough measures are proving largely ineffective at boosting that rate much higher.

Indeed, a number of forces—from the prospect of more Covid-19 cases in the fall to a weakening economy—could push the return rate into reverse, property owners and city officials say.

More than before, chief executives at blue-chip companies are stepping up efforts to fill their workspace. Facebook parent Meta Platforms, Amazon and JPMorgan Chase are among the companies that have recently vowed to get tougher on employees who don’t show up. In August, Meta told employees they could face disciplinary action if they regularly violate new workplace rules.

But these actions haven’t yet moved the national return rate needle much, and a majority of companies remain content to allow employees to work at least part-time remotely despite the tough talk.

Most employees go into offices during the middle of the week, but floors are sparsely populated on Mondays and Fridays. In Chicago, some September days had a return rate of over 66%. But it was below 30% on Fridays. In New York, it ranges from about 25% to 65%, according to Kastle Systems, which tracks security-card swipes.

Overall, the average return rate in the 10 U.S. cities tracked by Kastle Systems matched the recent high of 50.4% of 2019 levels for the week ended Sept. 20, though it slid a little below half the following week.

The disappointing return rates are another blow to office owners who are struggling with vacancy rates near record highs. The national office average vacancy rose to 19.2% last quarter, just below the historical peak of 19.3% in 1991, according to Moody’s Analytics preliminary third-quarter data.

Business leaders in New York, Detroit, Seattle, Atlanta and Houston interviewed by The Wall Street Journal said they have seen only slight improvements in sidewalk activity and attendance in office buildings since Labor Day.

“It feels a little fuller but at the margins,” said Sandy Baruah, chief executive of the Detroit Regional Chamber, a business group.

Lax enforcement of return-to-office rules is one reason employees feel they can still work from home. At a roundtable business discussion in Houston last week, only one of the 12 companies that attended said it would enforce a return-to-office policy in performance reviews.

“It was clearly a minority opinion that the others shook their heads at,” said Kris Larson, chief executive of Central Houston Inc., a group that promotes business in the city and sponsored the meeting.

Making matters worse, business leaders and city officials say they see more forces at work that could slow the return to office than those that could accelerate it.

Covid-19 cases are up and will likely increase further in the fall and winter months. “If we have to go back to distancing and mask protocols, that really breaks the office culture,” said Kathryn Wylde, head of the business group Partnership for New York City.

Many cities are contending with an increase in homelessness and crime. San Francisco, Philadelphia and Washington, D.C., which are struggling with these problems, are among the lowest return-to-office cities in the Kastle System index.

About 90% of members surveyed by the Seattle Metropolitan Chamber of Commerce said that the city couldn’t recover until homelessness and public safety problems were addressed, said Rachel Smith, chief executive. That is taken into account as companies make decisions about returning to the office and how much space they need, she added.

Cuts in government services and transportation are also taking a toll. Wait times for buses run by Houston’s Park & Ride system, one of the most widely used commuter services, have increased partly because of labor shortages, according to Larson of Central Houston.

The commute “is the remaining most significant barrier” to improving return to office, Larson said.

Some landlords say that businesses will have more leverage in enforcing return-to-office mandates if the economy weakens. There are already signs of such a shift in cities that depend heavily on the technology sector, which has been seeing slowing growth and layoffs.

But a full-fledged recession could hurt office returns if it results in widespread layoffs. “Maybe you get some relief in more employees coming back,” said Dylan Burzinski, an analyst with real-estate analytics firm Green Street. “But if there are fewer of those employees, it’s still a net negative for office.”

The sluggish return-to-office rate is leading many city and business leaders to ask the federal government for help. A group from the Great Lakes Metro Chambers Coalition recently met with elected officials in Washington, D.C., lobbying for incentives for businesses that make commitments to U.S. downtowns.

Baruah, from the Detroit chamber, was among the group. He said the chances of such legislation being passed were low. “We might have to reach crisis proportions first,” he said. “But we’re trying to lay the groundwork now.”

Bearish Bets Against Markets Are Surging

Investors are loading up their bets against a number of big tech stocks, positioning for a reversal.

Office owners are struggling with near record-high vacancy rates