What a record 50-day rally tells us about what happens next….

Thursday, 11th June 2020

What a record 50-day rally tells us about what happens next….

It is always worth reminding yourself from time to time that markets are essentially forward-looking….

They tend toward pricing-in what investors expect to see next rather than what investors have already seen go through….

  • What’s gone through….

Right now, large parts of the First World are experiencing three crises simultaneously….

There’s the health crisis – with the COVID-19 virus at the root of it….

There’s an economic crisis – created by the combined efforts of the virus and global government….

And there’s a social crisis – driven by the Black Lives Matter protests (you know you’re deep in crisis when boneheads from football hooligan ‘firms’ are rebranded as ‘defenders’ of the nation’s heritage)….

But you don’t need to worry about any of this stuff. Relax yourself, as Roy Keane might say. It’s all going to turn out great….

That’s the message being relayed by the markets….

  • Markets weren’t always so relaxed….

Sure, markets weren’t very relaxed back in March when the COVID-19 virus descended on the world and its inhabitants like some alien invader with bad intentions….

Stock markets worldwide went into freefall….

Looking back through the notes I take daily on events in the world of money, it  really did feel like markets might not pull-out of the nosedive….

Remember the sound of the Stuka dive bomber sirens you heard in old WWII films?  Markets sounded just like that back in March. Terrifying….

Everything hit bottom. The 10-year bull market that investors thought would never end came to a swift and spectacular end….

Here in the UK, the benchmark FTSE 100 fell below 5000. It was an 8-year closing low….

Over in the US, the S&P 500 had hit a new peak on 19th February….

Just over a month later on 23rd March, all the uncertainty and fear surrounding the COVID-19 virus had reverberated through the market and the index had lost a whopping 33.9% of its value….

All the gains made throughout the entire period of Donald Trump’s presidency had been wiped from the board – if not overnight then not far off it….

  • Disconcerting stuff….

This was record-breaking stuff. As disconcerting as it was unexpected….

This was a barely comprehensible sea-change in market outlook….

Hundreds of billions had been lost on stock values worldwide in no time at all. The global economy was in swift contraction. Billions in revenue was lost. Ditto tax take. Millions of jobs had gone the same way….

Confidence too was at an all-time low – amongst  investors, consumers, business owners, workers, institutions, pundits, economists and other influencers….

Nobody was putting a positive spin on anything. The gloom had descended. The Fear Index had visited an all-time high….

It was a mess. The idea that bounce-back could occur – to the extent that individual stock indices would be either hitting or close to hitting new highs  – before the summer was out would have seemed ridiculous…. fantastical even…. back in mid-March….

But that’s what has happened. It’s what is happening right now….

  • Government will prevail….

With the data and figures being reported daily in the global financial press, there’s no doubt many of the health, economic and social problems related to COVID-19 are yet to be tackled – let alone reversed, overcome or resolved….

But remember, markets are inherently forward-looking animals – and, looking forward into the future, the markets see these many serious and unprecedented problems being overcome….

Government will prevail. Government good sense will save the day…. well-thought-out government policies will work the magic…. government money…. ‘as much’ of the stuff  ‘as it takes’…. will cure all ills. Government will solve all these problems….

Or maybe it won’t. It hardly matters to the market….

All that government money coming straight off the printing presses – trillions of the stuff – is going into the system anyway….

  • Free money – good for the market….

Investors know that all this fresh-minted money is good for the market one way or another. It’s got to go somewhere after all….

And the market itself offers a pretty good advertisement of where plenty of that money might be put to best use….

The market has not only risen from the canvas since the low points of March, but it has sprouted new wings and taken off once again – like a young Icarus – to get as close to the sun as possible….

Refueled with hundreds of billions to date – and as much as it takes going forward – once again, there looks like no stopping it….

Here, the FTSE is clawing back lost ground. In the US, there is a new bull on the loose. The Nasdaq has hit new highs over the last seven days. The S&P is within sight of its historical top. So too the Dow Jones Industrial Average….

All over the globe, central banks are pumping new money into the system at a scale unseen since WWII – and probably headed well beyond that. All over globe stocks respond by riding at their highest price points since March….

I wonder how this game works….

  • What a big 50-day rise means….

In the 50-days leading up to 3rd June, the S&P 500 index grew some 39.6%….

That represents the largest 50-day rally in the entire history of that major US  index….

There are have only been seven other 50-day periods in its history where the S&P 500 has grown 20% or more….

And taken collectively those seven instance have something to tell us. It is this….

Expect further gains in the 12-months ahead….

On each of the seven occasions that the S&P 500 grew 20% or more in any 50-day period, returns over the next 12-month period weighed in at between 5.2% and 22.8%….

The average return across the periods amounted to 17.2%….

Those are great numbers for investors sitting on cash who are thinking about buying into government prowess, a ‘V’ shaped recovery and the world getting back to business as usual pronto….

  • I remain skeptical long-term….

The message from the market appears to be that the worst is over….

Maybe it is. Maybe it isn’t. Maybe the worst is yet to come….

I am sticking to the view that what is happening in the markets right now will prove to be a false dawn – one driven more by central bank bond-buying than anything related to real and measurable fundamentals in the real world of business and trade….

But the swiftness of the rebound tells me that there is likely money to be made in the stock markets in the meantime….

At least short term – going out 6, 12 18-months. At some point, I expect darkness to close in again….

That’s how it looks from here….

All the best.

Dave Gibson

Money Truths