US stocks are poised to complete their biggest monthly rally since 1974, taking the coronavirus-driven losses on the S&P 500 this year to just 9 per cent, despite an economic shock that towers over the great financial crisis.
While grim data trickles out of every major economy, stock markets have notched up healthy gains in April, pushing the FTSE All World index of global stocks to its best month since 2008 and nudging UK blue-chips into a bull market, up more than 20 per cent from their recent lows.
Some investors are reluctant to believe that the rallies can run much further, but are equally reluctant to bet against the unprecedented dose of medicine administered by central banks around the world.
“This rally in equities is clearly not driven by fundamentals — it’s driven by the liquidity support from the Federal Reserve,” said Torsten Slok, chief economist for Deutsche Bank Securities. “Companies are getting cash to keep the lights on through the significant support to credit markets.”
The rally has further bolstered the titans that dominate the US stock market. Amazon has gained 28 per cent since March 23, while Netflix is up 24 per cent, both benefiting from the shutdowns around the world that have kept billions of people indoors, reliant on home delivery and streaming entertainment.
“The best buy out there is Amazon — if the virus continues, Amazon wins; if the virus stops, Amazon wins,” said Andrew Left, a short seller who runs Citron Research. He has trimmed his negative bets on US stocks and put more money into the Seattle-based company in recent weeks.
“The markets are on a sugar high right now,” he added. “They’re not making much sense to me.”
Gilead Sciences, the California-based pharmaceutical group, is also among the best performing stocks this year with a gain of 28 per cent. The company added to the optimism on Wall Street on Wednesday after a trial found that its antiviral drug Remdesivir hastened patients’ recovery from coronavirus.
For weeks investors labelled the run in stocks that began after markets hit their lows on March 23 as a “bear market rally” — a short jump before another drop. However, this has been replaced by a “fear of missing out” as the effects of trillions of dollars in government spending lift markets.
“You have the FOMO. Once you get this strong rebound then you get more and more people nervous about missing out on the rally,” said David Riley, chief investment strategist for BlueBay Asset Management.
Mr Riley and others point to a big gap between signals from the commodities and bond markets — which indicate expectations for a long period of low growth — and stocks, which are pricing in a strong rebound for economic growth and corporate earnings. “It’s a tug of war between [central bank] policy and fundamentals, and right now, policy is winning,” he said.
That support from central banks is not the only fuel for the rises in stocks, although such actions do tend to boost riskier assets. By firing up bond prices and crushing yields, it also helps to make stocks more alluring.
Meanwhile, investors have been encouraged by the slowing spread of the virus and the prospect of a vaccine, however distant.
“The rollout of an effective Covid-19 treatment could contribute to a sustainable end to lockdowns, improve consumer confidence, and boost the global economy and markets,” said Mark Haefele, chief investment officer for UBS Global Wealth Management.
In addition, expectations for economic growth and corporate health are already so low that even the release of dire data and corporate profits are not enough to foster disappointment. “Earnings are dreadful, but we know that,” said Mr Riley at BlueBay.
Still, deep concerns persist. US companies’ earnings are set to drop 16 per cent in the first quarter, according to Credit Suisse estimates, and may not fully recover for years. The US economy is also facing a sharp contraction, with 26m Americans losing their jobs in the past five weeks.
On Wednesday, the US Bureau of Economic Analysis revealed that first-quarter economic activity fell at an annualised rate of 4.8 per cent, a swifter and deeper drop than feared.
“Once you get into the second quarter, you will get more earnings, more guidance, more defaults picking up and maybe that provides the catalyst for a pullback,” said Mr Riley. “But right now, the pain trade is higher.”\
