Investors' bullish mindset proves hard to shift

Despite the global economy being mired deep in recession, the stockmarket rally continues.

There are “dark rumblings” on Wall Street, says Randall Forsyth in Barron’s. The stockmarket rally continues but the economy is in “deep recession”, as illustrated by the 20.5 million US jobs lost in April. The S&P 500 has bounced back by 30% since hitting a low on 23 March, with the FTSE 100 gaining 20%. America’s technology-heavy Nasdaq index has recouped all of its losses and is up for the year as a whole. 

A fool’s rally

The rapid shift from “panic to optimism” in March came thanks to massive central- bank support, says The Economist. The US Federal Reserve’s unprecedented decision to buy corporate bonds has triggered a bonanza: corporates have issued $560bn in new debt over the past six weeks, twice the usual amount. US equities are now higher than they were last August. Yet investors are wrong to be so blasé about the risks ahead. A second wave of Covid-19 infections could bring more economically devastating lockdowns later in the year. 

The habits of the long bull market that preceded the March crash are proving hard to break, says John Mauldin in his Thoughts from the Frontline newsletter. Investors accustomed to seeing “big risks” turn into “big rewards” are reluctant to adapt to a changed world. When this round of risk-taking comes to an end the results will not be pretty. 

Goldman Sachs this week said that the S&P 500 could be heading for an 18% drop over the coming months because of a premature end to lockdowns in many US states and a poor dividend outlook. 

Prepare for de-globalisation

“Markets are often wrong but they are not completely stupid”, says Jonathan Allum in The Blah newsletter. Everybody knows that the situation is dire and that the recovery will be slow, but markets can be “surprisingly patient”. The rally suggests confidence that things will eventually get back to something like normal – not that everything is rosy now.

Closer analysis suggests there is method in the market’s apparent madness, agrees William Watts for MarketWatch. If investors were betting on a typical economic recovery, then they would be piling into cyclical sectors such as banks and industrials. Yet the rally is being overwhelmingly led by pharmaceutical and technology stocks that stand to gain from the rise of a “work-from-home economy”. That seems sensible. The dearth of such companies in Europe is a major reason why the rally has been strongest in America.

Those putting all their chips on US tech are making a mistake, says Rana Foroohar in the Financial Times. We are entering an era of deglobalisation, with governments in the US, China and Europe intent on reshoring production and developing their own national champions. That will mean more competition for America’s tech giants. There is also a political backlash against big corporations. Take Amazon, where business is booming but pressure from labour unions and scrutiny from regulators has never been more intense. A future of more red tape and higher taxes will mean lower stockmarket returns. 

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