The big bear market rally hit a bit of a speed bump yesterday.
A recent spate of decent-looking results from the banking sector and some "less bad" economic data has helped fuel optimism over the past month or so. But Bank of America injected a big dose of reality as it warned that bad debts had tripled over the past year, as consumers continue to suffer.
The FTSE 100 fell by more than 100 points in late trading to end the day at 3,990, after rising by around 17% since the start of March, while US stocks also took a dive, with the Dow Jones ending down 289 points at 7,841.
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But the real miracle is that the rally lasted for this long...
Yesterday's stock market falls are no surprise
Stock markets took a tumble yesterday as poor results from Bank of America brought investors back down to earth. It wasn't all about BoA though. Risk appetite in general took a hit, sending most markets tumbling the price of oil took a dive as fears mounted again over global demand. Meanwhile, 'safe haven' assets made gains once again the price of gilts rose while gold also moved higher.
This shouldn't come as a huge surprise of course. Just because the economy's not collapsing quite as rapidly as it was, doesn't mean that everything is now just fine. And with the earnings reporting season pretty much upon us, investors are starting to get nervous about just how difficult companies will reveal things are getting.
As David Buik of BGC Partners told The Times: "We have got ahead of ourselves. The recent rally has been insane the dole queue is still lengthening, which will increase foreclosures, which hits retailers, which lengthens the dole queue more, and so it continues. The next three months are going to be brutal for the economy and people have suddenly remembered this."
Why the big rally?
So why the big rally in the first place? Well, the whole surge demonstrates that investors still haven't been completely shaken out of bullish mode. There's that real desire to go 'bargain-hunting', and get back into the market, and to write off bad news far too quickly, that characterises the slow death of the bull mentality. But until that instinctive bullishness gives way to despair, the markets are unlikely to hit their true bottom.
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Albert Edwards of Socit Gnrale points out that, when the market hit a low point in March, "where was the universal excess bearishness that typically marks the end of major bear markets?... Before I can go overweight equities, I need not just cheap valuations, I need to see despair and revulsion."
But the thing that makes bear market rallies so powerful, is that the longer they go on, the more likely they are to pull in a lot of otherwise sceptical investors. It's hard to maintain any sort of strong conviction when the market is in such a confused state. And that means that as stocks keep rising, there's a growing sense of panic from those investors still sitting on the sidelines. The longer a rally goes on, the more people begin to worry that it's the real thing, and that they're wrong to maintain their bearishness. The more gains they lose out on, the more tempted they become to throw caution to the winds and pile in.
You're the best person to manage your funds
Oddly enough, this is particularly acute for fund managers and City professionals. Their bonuses and reputations tend to be measured in periods of three months at a time. So there's a lot of performance anxiety when they realise that by missing out on a decent rally, they're going to be at the bottom of the table this quarter.
This is another good reason (on top of the exorbitant fees) to use trackers or exchange-traded funds rather than actively managed ones, and to take more charge of your own investment portfolio generally. Because the reality is that you probably have a longer-term investment horizon than your fund manager does.
You can ignore getting suckered in by bear market rallies and the like because you don't have to worry about how your six-month performance figures will look on any marketing materials, or what this quarter's market movements will mean for your position in the fund manager league tables. All you have to care about is your long-term investment goals and whether you are anywhere near meeting them.
In the current issue of MoneyWeek, our Roundtable experts discuss the state of the market and how long it might take before we see a genuine rally. But more importantly, they also talk about where you should be putting your money in the meantime you can find out what they recommend here. If you're not already a subscriber, subscribe to MoneyWeek magazine.
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John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.
He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.
His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.
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