Stocks are cheap, but they'll get cheaper

The recent rally has had bulls back on their feet, and optimisim is spreading. But it is a bumpy road ahead, and we're nowhere near a bull market yet.

"There's nothing like a 20%-odd rally to bring knackered bulls to their feet," says Lex in the FT. By the end of last week, the S&P 500 and the MSCI World index had gained more than 20% from their March lows and other major indices weren't far behind. Optimism has spread, with Barclays Capital declaring last week that "the bear market is probably over" earnings expectations are now so low that any surprises are likely to be positive, and the global recession is starting to bottom out. Goldman Sachs, meanwhile, has developed a model that implies average annual real returns over the next five years of 20%-25% in Britain, 15%-20% in continental Europe and 10%-15% in America.

But a setback on Monday, with markets falling by 3%-5% across the world, was a stark reminder of the bumpy road ahead. Investors were rattled by the US administration's warning that some American banks would need more government aid. Meanwhile, Spain's government has had to bail out Caja Castilla, a regional lender. With the housing market collapsing and unemployment rocketing, this won't be the last Spanish bail-out.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free
https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748.jpg

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up
MoneyWeek

MoneyWeek is written by a team of experienced and award-winning journalists, plus expert columnists. As well as daily digital news and features, MoneyWeek also publishes a weekly magazine, covering investing and personal finance. From share tips, pensions, gold to practical investment tips - we provide a round-up to help you make money and keep it.