Stockmarkets are “flying in the dark”

Fund managers remain bullish on equities, but nobody really knows what will happen in the stockmarkets.

Are we heading for “Trade War 2.0”? asks Robert Carnell of ING. US criticism of China’s role in the Covid-19 outbreak has reached a “crescendo”, with Donald Trump reportedly considering the reimposition of tariffs. Secretary of State Mike Pompeo has said there is “enormous evidence” that the coronavirus originated in a Chinese laboratory. A rising stockmarket may have persuaded the White House that it is safe to start tariff sabre-rattling once more. 

Meanwhile, global markets enjoyed a very profitable April. America’s S&P 500 gained 13%, its biggest one-month gain in 33 years. British blue-chips were unfazed by a wave of dividend cuts. The FTSE 100 entered a technical bull market last week (defined as a 20% rise)after rallying 22% from its March lows. 

A pause for breath?

A weaker start to May, however, suggests that shares could be in for a “tale of two halves”, says Rupert Thompson of Kingswood. After staging the “sharpest ever” recovery from a bear market, equities may now pause for breath. The worsening dispute between Washington and Beijing is a reminder that last year’s trade war never entirely went away. 

Yet fund managers are still extremely bullish, says John Mauldin in his Thoughts from the Frontline newsletter. The most recent “Barron’s Big Money Poll” of 107 investment managers finds that 39% think stocks could rise by year-end and only 20% are bearish. Just over 80% are bullish for 2021. A “great disconnect” has emerged between the stockmarket and the economy, says Randall Forysth in Barron’s. Over 30 million Americans are unemployed and the gloomiest forecasters think that year-on-year GDP could collapse by an annualised 40% in the second quarter. Why are stocks so perky? Thank central bankers, who have stepped in with levels of monetary support unprecedented in peacetime. The size of the US Federal Reserve’s balance sheet has already broken through $6trn and could ultimately hit $10trn – 50% of GDP. 

The earnings fog

Markets think that the rescue is working, says Gillian Tett in the Financial Times. Central bank liquidity has eased strains in credit markets, enabling cash-strapped businesses to borrow more money. Bullish investors think that these firms are positioned to lead a swift recovery once the lockdown is over. Yet the longer this goes on the greater the risk that some businesses will “quietly” become insolvent. Central banks cannot solve this problem and it would mean longer-lasting damage. 

The murky outlook has made shares difficult to value, write Karen Langley and Caitlin Ostroff for The Wall Street Journal. Analysts disagree more about this year’s S&P 500 earnings outlook than at any point since May 2009. The average forecast profit decline for 2020 is 18% but Bank of America, for one, predicts a 29% fall. Frustrated economists have turned to everything from Google search trends to restaurant reservations in a bid to glean some insight into what is really going on. Stockmarkets are “flying in the dark”. 

Recommended

What you should do if your energy provider goes bust
Personal finance

What you should do if your energy provider goes bust

At least four energy firms have gone under in recent days as the price of gas and electricity soars. Saloni Sardana looks at what to do if your energy…
20 Sep 2021
China’s property woes are coming to a head – so what happens now?
China stockmarkets

China’s property woes are coming to a head – so what happens now?

Chinese property giant Evergrande is in big trouble. And with no bailout plan yet, markets are getting nervy. John Stepek looks at how things might go…
20 Sep 2021
Three strong Asian stocks trading at bargain prices
Share tips

Three strong Asian stocks trading at bargain prices

Professional investor Nitin Bajaj of the Fidelity Asian Values investment trust picks three stocks that dominate their industries, earn good returns o…
20 Sep 2021
Iris Apfel: an inspiration to young fashionistas
People

Iris Apfel: an inspiration to young fashionistas

Iris Apfel made her name as a high-society interior designer before a show at the New York Met turned her into a fashion influencer. At 100 years old,…
19 Sep 2021

Most Popular

The times may be changing, but don’t change how you invest
Small cap stocks

The times may be changing, but don’t change how you invest

We are living in strange times. But the basics of investing remain the same: buy fairly-priced stocks that can provide an income. And there are few be…
13 Sep 2021
Two shipping funds to buy for steady income
Investment trusts

Two shipping funds to buy for steady income

Returns from owning ships are volatile, but these two investment trusts are trying to make the sector less risky.
7 Sep 2021
How to stop recurring subscriptions becoming a drain on your money
Personal finance

How to stop recurring subscriptions becoming a drain on your money

Tracking and pruning subscriptions isn’t as easy as it sounds. Here's how to take charge.
14 Sep 2021