Is the worst of the market rout over?
Have we seen the worst of the stockmarket crash or do equities have further to fall?
Are we already over the worst of the market rout? JPMorgan analysts this week declared that “most risky markets have probably made their lows for this recession”. The note coincided with a market rally that has gathered pace over recent days. The S&P 500 is up 17% and the FTSE 100 has gained 12% since bottoming on 23 March. By Monday, global assets had recouped roughly one-quarter of their losses since the market crash began in February. So was that it? Or do stocks have further to fall?
The essence of a bear rally
Stocks have taken off as though “recovery were at hand”, says Randall Forysth in Barron’s. Yet “anybody who has been around for a... cycle or more” will see the recent “pop” as the “very essence of a bear-market rally”. During bear markets asset prices move downwards, but they are punctuated by brief rallies that tempt in the gullible before dissipating.
This year will be a washout for corporate earnings, says Morgan Stanley in a note. US earnings per share could well slump by 20% or more amid the global lockdown, but bulls are betting that we will see a strong rebound in 2021.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
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
Stock valuations are based on expectations about future earnings, not the present situation. The recently approved $2trn American stimulus package, which is worth about 10% of US GDP, is another cause for optimism. The dramatic sell-offs of the past month are “the conditions from which great investment opportunities are born”. The urge to jump back in is understandable, says Spencer Jakab for The Wall Street Journal. A surprisingly large chunk of returns are generated in the early days of a bull market, when most are still too fearful to invest. Yet US equities are hardly a bargain now.
On a cyclically adjusted price/earnings ratio of 23.8, US stocks are still far above the historical average of 16. What’s more, as Michael Mackenzie points out in the Financial Times, a drumbeat of “shocking” data and earnings downgrades are likely to give sentiment a further “debilitating punch” over the coming weeks.
Tread carefully in the FTSE
Valuations on this side of the Atlantic are much more reasonable, but the history of the FTSE suggests that caution is still advised, says Russ Mould of AJ Bell. Seven of the ten biggest gains in the index’s history came as false dawns during bear markets that later “cruelly” turned out to be “nothing more than bear traps for the unwary”.
Optimists says this is not a traditional bear market at all, says Tom Stevenson in The Daily Telegraph. The unusual speed of the market slump could mean that we are living through a short, sharp shock, more akin to the 1987 crash. Such events are typically followed by rapid rallies and stocks regain their previous highs within about 15 months.
Yet the latest pick-up could just as well be a classic bear trap, particularly if governments fail to get a grip on the spread of Covid-19. Enjoy any rallies, but don’t take them “too seriously”.
Sign up to Money Morning
Our team, led by award winning editors, is dedicated to delivering you the top news, analysis, and guides to help you manage your money, grow your investments and build wealth.
Alex is an investment writer who has been contributing to MoneyWeek since 2015. He has been the magazine’s markets editor since 2019.
Alex has a passion for demystifying the often arcane world of finance for a general readership. While financial media tends to focus compulsively on the latest trend, the best opportunities can lie forgotten elsewhere.
He is especially interested in European equities – where his fluent French helps him to cover the continent’s largest bourse – and emerging markets, where his experience living in Beijing, and conversational Chinese, prove useful.
Hailing from Leeds, he studied Philosophy, Politics and Economics at the University of Oxford. He also holds a Master of Public Health from the University of Manchester.
-
The top stocks in the FTSE 100
After a year of strong returns for the UK’s flagship index, which FTSE 100 stocks have posted the best performance in 2024?
By Dan McEvoy Published
-
A junior ISA could turn your child’s pocket money into thousands of pounds
Persuading your child to put their pocket money in a junior ISA might be difficult, but the pennies could quickly grow into pounds – and teach them a valuable lesson about money
By Katie Williams Published
-
Halifax: House price slump continues as prices slide for the sixth consecutive month
UK house prices fell again in September as buyers returned, but the slowdown was not as fast as anticipated, latest Halifax data shows. Where are house prices falling the most?
By Kalpana Fitzpatrick Published
-
Rents hit a record high - but is the opportunity for buy-to-let investors still strong?
UK rent prices have hit a record high with the average hitting over £1,200 a month says Rightmove. Are there still opportunities in buy-to-let?
By Marc Shoffman Published
-
Pension savers turn to gold investments
Investors are racing to buy gold to protect their pensions from a stock market correction and high inflation, experts say
By Ruth Emery Published
-
Where to find the best returns from student accommodation
Student accommodation can be a lucrative investment if you know where to look.
By Marc Shoffman Published
-
Best investing apps
Looking for an easy-to-use app to help you start investing, keep track of your portfolio or make trades on the go? We round up the best investing apps
By Ruth Emery Last updated
-
The world’s best bargain stocks
Searching for bargain stocks with Alec Cutler of the Orbis Global Balanced Fund, who tells Andrew Van Sickle which sectors are being overlooked.
By Andrew Van Sickle Published
-
Revealed: the cheapest cities to own a home in Britain
New research reveals the cheapest cities to own a home, taking account of mortgage payments, utility bills and council tax
By Ruth Emery Published
-
UK recession: How to protect your portfolio
As the UK recession is confirmed, we look at ways to protect your wealth.
By Henry Sandercock Last updated