Advertisement

Stockmarkets stumble – but the bulls charge on

Global markets registered their worst day in months last week, but US retail investors continue to pile in.

Stocks can go down as well up, says The New York Times. Markets have been rallying almost continuously since the March bottom, but last week brought a reminder that gains can quickly turn into losses. Global markets registered their worst day in months on Thursday, with America’s S&P 500 tumbling 5.9% and the Dow Jones index down 7%. The FTSE 100 shed almost 4%. 

Advertisement - Article continues below

Signs of a revival in Covid-19 are tempering the “exuberance”, says Randall Forsyth for Barron’s. Case numbers are rising in 20 US states and there are signs of a new outbreak in China. Even this relentlessly optimistic rally would be unlikely to survive a second wave.

Robinhood to the rescue

Markets staged a patchy recovery during the first part of this week, but the pullback has given succour to those who think that we are in a “bear market rally”: a period of optimism within a structural downtrend.  

A recent Bank of America survey of market professionals found that 53% think this is a bear market rally and a net 78% believe stocks are overvalued, a record number, says John Melloy on CNBC. 

Advertisement
Advertisement - Article continues below

That is more than said the same thing on the eve of the dotcom bubble bursting. The current optimism is based on talk of a “V-shaped” recovery, yet just 18% expect such a rapid snapback in activity.

Advertisement - Article continues below

Why are markets surging when so many professionals are wary? Many point to trading app Robinhood, which is enabling casual US investors to take a punt on stocks, says John Authers on Bloomberg. They are usually derided as the “dumb money”, but research by investment banks shows that they have done a better job than the professionals at picking stocks of late. Perhaps for the first time since the late 1990s retail money is having a real impact on market movements. 

The trouble is that retail investors have also been enthusiastically buying up struggling firms with terrible balance sheets because they look cheap. My inner “curmudgeon [says] this will end in tears”.

The rally continues

Hopes of a V-shaped recovery endure. Incoming data certainly points to one for now, as Chetan Ahya of Morgan Stanley points out. Driving indices show that people in the US and Germany are moving around at pre-virus levels again. The latest round of survey data show improvements in May across major economies, suggesting that April was the global bottom. This week the US reported a record jump in retail sales.

The recovery will be lengthy, but a gradually improving economy is likely to keep stock prices buoyant, says Oliver Jones of Capital Economics. The surge of monetary and fiscal support is proving a powerful tailwind for asset prices. Some stockmarkets also look pricier than they really are: valuations are based on bombed-out 2020 earnings forecasts, but earnings next year and thereafter are likely to be much better. That should mean that the recovery in risk assets has further to run.

Advertisement
Advertisement

Recommended

The British equity market is shrinking
Stockmarkets

The British equity market is shrinking

British startups are abandoning public stockmarkets and turning to deep-pocketed Silicon Valley venture capitalists for their investment needs.
8 Nov 2019
There are lots of reasons to be bearish – but you should stick with the bulls
Stockmarkets

There are lots of reasons to be bearish – but you should stick with the bulls

There are plenty of reasons to be gloomy about the stockmarkets. But the trend remains up, says Dominic Frisby. And you don’t want to bet against the …
17 Jul 2019
What gold, bonds and tech stocks have in common
Stockmarkets

What gold, bonds and tech stocks have in common

"Risk off" or "safe haven" assets such as gold and government bonds have been doing well lately. But so have riskier tech stocks. That seems to defy c…
10 Jul 2020
How Covid-19 sparked the return of the day trader
Investment strategy

How Covid-19 sparked the return of the day trader

Lockdown boredom has unleashed a horde of speculators on US stocks, with predictable consequences.
7 Jul 2020

Most Popular

What gold, bonds and tech stocks have in common
Stockmarkets

What gold, bonds and tech stocks have in common

"Risk off" or "safe haven" assets such as gold and government bonds have been doing well lately. But so have riskier tech stocks. That seems to defy c…
10 Jul 2020
An economics lesson from my barber
Inflation

An economics lesson from my barber

On reopening his shop after lockdown, Dominic Frisby’s barber doubled his prices. It’s all part of the post-Covid inflation process – and we’re going …
8 Jul 2020
Share tips of the week
Share tips

Share tips of the week

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
10 Jul 2020