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%. 

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. 

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.

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.

Recommended

Emerging markets: the Brics never lived up to their promise – but is now the time to buy?
Emerging markets

Emerging markets: the Brics never lived up to their promise – but is now the time to buy?

Twenty years ago hopes were high for Brazil, Russia, India and China – the “Brics” emerging-market economies. But only China has beaten expectations. …
18 Oct 2021
Three dividend stocks from the dynamic Asia/Pacific region
Share tips

Three dividend stocks from the dynamic Asia/Pacific region

Professional investor Sat Duhra of the Henderson Far East Income investment trust highlights three of his favourite stocks.
18 Oct 2021
India: the next global growth engine
Emerging markets

India: the next global growth engine

India's stockmarket is booming, up by 37% so far this year, and the BSE Sensex index has delivered an annualised return over the last five years of mo…
15 Oct 2021
Central banks must carry the can for the state we're in
Economy

Central banks must carry the can for the state we're in

Central banks’ efforts to prevent markets adjusting have led to a dangerous social and financial disequilibrium, says Tim Lee.
13 Oct 2021

Most Popular

How to invest as we move to a hydrogen economy
Energy

How to invest as we move to a hydrogen economy

The government has started to roll out its plans for switching us over from fossil fuels to hydrogen and renewable energy. Should investors buy in? St…
8 Oct 2021
How to invest in SMRs – the future of green energy
Energy

How to invest in SMRs – the future of green energy

The UK’s electricity supply needs to be more robust for days when the wind doesn’t blow. We need nuclear power, says Dominic Frisby. And the future of…
6 Oct 2021
Why the world’s most important economic data release has unnerved markets
US Economy

Why the world’s most important economic data release has unnerved markets

The US added only 194,000 jobs in September, far shorter than the 500,000 that were expected. John Stepek explains why markets didn't react as they no…
11 Oct 2021