Global stockmarket bulls start to stampede

Global stockmarkets' rise suggest investors are optimistic that the economy is heading for better days. But bad earnings data could put their faith to the test. 

The global stock rally has “reached a tipping point”, writes John Authers on Bloomberg. The S&P 500 has bounced by more than a third since its March nadir, with the FTSE 100 advancing by almost 25% over the same time period. 

Many commentators have been perplexed by the strength of the comeback. The virus is still far from under control, a vaccine looks far off and global unemployment has risen to Depression-era levels. Yet bulls argue that the economy will be able to stage a swift recovery now that lockdowns are being lifted and point to the tidal wave of central-bank liquidity juicing market returns.

Cyclicals join the party

The rally has been spearheaded by technology and pharmaceuticals, but in recent weeks more cyclical businesses such as carmakers, retail and travel have been catching up. That suggests that rather than simply pricing in the winners and losers of lockdown, markets are now optimistic that the economy as a whole is heading for better days.

The market has staged a recovery far swifter than that seen after previous crashes, notes Authers. The “great majority” of S&P 500 stocks are now trading above their 50-day moving average, a technical measure that historically spells further gains to come. The “force and momentum” of the current rally can no longer be denied. Investors who were once sceptical are now “prepared to believe the best”. 

The “doubters” are turning into “believers”, agrees Richard Henderson for the Financial Times. American retail investors have decided to buy the dip. Morgan Stanley reports that users of trading app Robinhood have “more than doubled their positions” in US blue chips since the rally started. Strikingly, depressed travel businesses American Airlines and cruise operator Carnival are among the most popular plays. Steven DeSanctis of Jefferies says that frenetic trading of biotech stocks has started to resemble the “frothy buying” of the dotcom bubble.

Fundamentally unsound

US consumer spending dropped by 13.6% in April, the biggest monthly fall on record. American consumption accounts for about 70% of US GDP and is a key driver of global growth. Yet with more than 40 million unemployed, many are tightening their belts.

The Congressional Budget Office forecasts that the pandemic will cost the world’s biggest economy a cumulative $7.9trn in lost real GDP over the coming decade. That dims the outlook for company profits, the key driver of equity valuations. Analysts expect a 20% year-on-year drop in S&P 500 earnings over the next four quarters, reports Justin Lahart for The Wall Street Journal.

Falling earnings and rallying stock prices have pushed the US market’s valuation up to 21.6 times expected earnings, “territory last seen during the dotcom bubble”. Optimists say that the role of markets is to look through the turmoil to better days ahead. But the relentless drumbeat of bad earnings data could yet put the faith of stockmarket bulls “to the test”. 

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