In many ways, the trends that started in March continued during April. First, rather gloomy economic data kept flowing in. In major economies, growth forecasts have been revised …
downward again, with unemployment moving in the opposite direction. At close to 9%, the jobless rate in the euro zone is nearly back where it was when the previous recession was nearing its end. The credit contraction continues, in particular for non-bank credits, credit markets and securitization.
And while the indebtedness of private households is no longer rising, the rebuilding of savings is dampening consumption.
The way investors reacted to April’s news was also similar to their behaviour in March. Despite a distinctly negative news flow – both on the corporate earnings and macroeconomic side – markets continued their strong upward trend. The market response to the release of first-quarter growth data in the US was particularly striking: Although the actual figure was weaker than expected (-6.1%), stock markets reacted very positively, supposedly because some components of the headline figures were pointing to a slower pace of economic contraction. In the two months since their lows of 9 March, euro zone stocks have rallied by 36% (DJ EuroStoxx 50). While defensive sectors have lagged somewhat, companies with weaker balance sheets and higher debt have outperformed: Euro zone banks, for example, gained 117% while telecoms added just 9% (in euros, from 9 March to 8 May).
Such extreme movements in such a short time have divided investors into two separate camps. The conundrum can be summed up by the following question: “Is this a bear market rally or the start of a new bull market?” The difference is not just in the wording. Only very active traders can participate in a bear market rally, which is typically short and virulent. A bull market, in turn, offers long-term investors the opportunity to return to the market. For the moment, institutions are not adding risk to their portfolios by increasing their equity holdings. The latest data of the Investment Company Institute even show that US institutions were still adding to their money market holdings by 24 April: Zero-yielding funds hit their highest assets ever after two months of an impressive stock market rally.
As this movement is two months old, scepticism dominates in market commentaries and portfolio positioning. The fact is that a 36% progression in a matter of two months equals an annualised performance of 550%. Whenever a market is able to climb the wall of worry, it looks like something real. Putting it the other way around, waiting for a blue sky before you invest is the safest way not to make any money at all.
For the next few months, a pause would seem plausible. While an exaggeration on the downside was naturally followed by an exaggeration on the upside, this could be more than a dead cat bounce. If, at some point, long-term investors decide to jump onto the bandwagon, the stock market may enter a new phase. There can be no long-term market movement without the participation of long-term investors. By the beginning of May, there is still no sign of that.
Source: ETFWorld.com – Invesco
Lascia un commento