Is the “bear market rally” over? America’s S&P 500 index finished last week 6.9% off its 8 June high, says Chuck Jones on Forbes. The problem is a surging coronavirus epidemic in the southern states, with new cases across Texas, Arizona and Florida more than quadrupling since the start of June. Add in “very high” equity valuations and it is difficult to see how this rally continues.
The FTSE underperforms
America’s Covid-19 failures are now difficult to ignore, says John Authers on Bloomberg. Mobility data in affected states is sagging again even as levels in much of Europe return to normal. Hotel, cruise and airline stocks have come under renewed pressure.
Talk of a “trade-off” between fighting the coronavirus and saving the economy has proved a false choice. If Covid-19 is rampant then consumers will choose to stay home, preventing the economy from functioning normally.
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On this side of the Atlantic, markets have probably learnt to live with the idea that there will be “occasional flare-ups” in cases, says Jim Armitage for the Evening Standard. Yet the FTSE still finished the second quarter on a gloomy note following news that UK GDP fell at its fastest pace in 41 years in the first quarter.
The FTSE 100 finished the second quarter this week up 9%, its best return in a decade. Yet it remains down 18% for the year as a whole, significantly worse than the 5% fall on the S&P 500 or the 8% decline on Japan’s Topix and Germany’s Dax indices. The London market remains a “serial underperformer” compared with other major markets, says Michael Hewson of CMC Markets.
The easy money has been made
There is an argument that US stocks are actually cheaper than they should be, says James Mackintosh in The Wall Street Journal. Near-zero interest rates are locked in for the foreseeable future and Treasury bond yields are “on the floor”, so their yields will not tempt equity investors.
With money so cheap, financial models imply that stock valuations should be high. Savers, after all, have few other places to earn a decent return. Yet vertiginous valuations are starting to induce “altitude sickness” in some investors, says Edward Bonham-Carter of Jupiter Asset Management. The resurgence in US coronavirus cases will keep stock markets under pressure for now, reckons Oliver Jones for Capital Economics. Yet we are far from bubble territory. One reason that valuations look so high is because analysts have slashed earnings forecasts for this year, but profits should rebound once the pandemic is behind us. Equities are poised to outperform, just so long as runaway virus outbreaks don’t force any major economies back into lockdown again.
Talk that much higher earnings are just around the corner sounds like bubble logic, says Randall Forsyth in Barron’s. Globally, stocks have just had one of their best quarters in decades. Markets are not necessarily heading for a crash, but it seems the “easy money has been made… caution should be the byword”.
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