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If the stock market's sharp volatility in March came as a shock, the subsequent recovery has been far more surprising.
It wasn’t hard to understand why share prices plummeted as the world went into lockdown to slow the spread of Covid-19, but the rebound is harder to explain. It has been described as the most hated rally in history, and is probably the least expected.
Investors now fear being sucked into a recovery only for share prices to crash again as the world tips into recession. So why is it happening and can it continue?
You may not be able to comprehend this rally, but the longer it lasts the harder it is to ignore. Global stocks flew again on Friday, after US non-farm payroll data showed 2.5 million jobs being created in May, instead of the anticipated 7.5 million loss.
That astonishing figure still leaves US unemployment at 13.3 per cent, while Bank of America suggests it could be as high as 21.6 per cent, but investors were in no mood to quibble and bought more shares.
Fawad Razaqzada, market analyst at ThinkMarkets, says non-farm payroll data “absolutely smashed expectations” as virtually nobody had expected a positive number. “This suggests the economy is turning around faster than most people expected.”
The S&P 500 is now up more than 40 per cent from its March lows, while Asian markets hit a three-month high and shares in the UK and Europe rose strongly as well.
Oil was up in anticipation of increased demand with Brent crude topping $42 a barrel, while safe haven gold fell below $1,700 an ounce as investors embraced risk instead.
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Markets got a further rocket from the European Central Bank (ECB), which increased its Pandemic Emergency Purchase Programme (PEPP) by €600 billion (Dh2.48 trillion), lifting total ECB stimulus to €1.35 trillion, while the German government agreed to a €130bn fiscal stimulus package.
The US is lining up another $1tn (Dh3.67tn) of stimulus for June, and this wall of money is the real reason markets have decoupled from the real economy.
In today’s “risk-on” world investors are screwing up their courage and going bargain-hunting in oversold sectors such as airlines, hotels and car manufacturers, while selling off safe havens such as the US dollar and gold.
Chris Beauchamp, chief market analyst at online trading platform IG, says the US economy is back with a bang: "Canadian employment activity surged too, suggesting a V-shaped recover."
When shares dip, investors snap them up, because "they clearly think the recovery will be much swifter than originally feared,” he says.
The big worry is that the US Federal Reserve may scale back its stimulus in response. “That might be the one thing that can halt this raging stock market,” Mr Beauchamp adds.
Private investors will be astonished to hear endless talk about a raging stock market, given that the world is still hurtling into the fastest ever recession, with US gross domestic product predicted to shrink by anything from 5 per cent to 30 per cent in the second quarter, depending on whose figures you believe.
Jeremy Gatto, multi-asset investment manager at global asset manager Unigestion, says the unprecedented stimulus will see the Fed's balance sheet soar beyond $7tn and could ultimately total half the country's GDP, making the coronavirus shock short lived. “Our indicators suggest the worst is likely to be behind us,” he adds.
Investors are sitting on high levels of cash, and will be keen to invest in the recovery. Unigestion is now “overweight” on global equities as it expects them to recover faster than other asset classes as the world picks itself up after the pandemic.
The rally has also vindicated those who advised investors to resist the urge to sell shares in the crash, but take the opportunity to buy them at bargain prices instead.
Maurice Gravier, chief investment officer at Emirates NBD, says the rally has been driven by central bank liquidity and rock bottom interest rates, and this is what markets are focused on. “That is why we recommended buying back in March the stocks we sold in February.”
He says investors were "collectively underinvested” after the crash, which is one reason they hate the rally. “The recovery can last as long as we have incremental good news on the economy, support from central banks, and a pool of capitulating investors.”
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Mr Gravier warns this will not last forever as “valuations are elevated, and the recent broadening of the rally, from typical pandemic plays like healthcare and technology to more cyclical segments, indicates much higher expectations for the economy".
The worry is that share prices now look "priced for perfection” when plenty could still go wrong. "The summer could be volatile,” Mr Gravier adds.
Zainab Kufaishi, head of Middle East and Africa at fund manager Invesco, also cautions against getting swept away by the rally, as Covid-19 is not beaten yet.
She suggests there is still value in this market with share prices trading at "reasonable multiples”, but warns the outlook for company earnings and dividends is weak. “Investors must remain diversified and invested for the long term.”
Obvious dangers include a second wave of the pandemic, the ongoing US-China trade war and social unrest as unemployment soars, although again, markets are ignoring all these factors right now.
All that matters is the stimulus, that investors believe will flow into stock markets and potentially drive them beyond pre-pandemic highs.
Some companies will inevitably go bust, though, so choose your stocks carefully. Another concern is inflation.
Steen Jakobsen, chief economist at Saxo Bank, says total liquidity and fiscal stimulus is now larger than global GDP. "This is creating a market where too much money is chasing too few assets.”
He warns we have yet to see the full effects of rising employment, due to government-funded furloughs and universal income schemes in the US and Europe.
Markets tend to act in advance of the real economy, as investors gaze to the future. “In 2009, the true impact on jobs came nine months after the stock market low," says Mr Jakobsen. "Rising unemployment is a real risk to the economy, as it hits demand and consumption, but will only make itself felt in the third quarter of this year.”
Investors must therefore brace themselves for another shock as "we might have seen the stock market low, but we have not felt even 20 per cent of the real economic impact", Mr Jakobsen says.
Markets also have to factor in uncertainty over the forthcoming US Presidential election, to be held on November 3. “If the EU fails to deliver on its much-hyped NextGeneration recovery plan, that will also hit growth,” Mr Jakobsen says.
Saxo Bank is nonetheless “overweight” on European shares, which it expects to rise faster than US stocks from here.
As ever, stock market movements are impossible to call. Today’s astonishing recovery has proved that once again.
Investors will be feeling under pressure to join in the fun, but they should tread carefully as the fastest part of the rally may have passed and markets may slow from here. Old investment principles apply, even in the current madness: do not put all your eggs in one basket and only invest money for the long term.
Investors may loathe this rally but Mr Beauchamp says they would have to be brave to bet against it, as economic data improves while stimulus programmes remain in place. “Those expecting a further downturn in stocks will continue to beat their heads against these two pillars,” he says.
The real danger will come when people stop hating this rally, and allow themselves to love it instead.