The recent recovery in stocks has been as impressive as the speed of the crash that preceded it. Is this a resumption of the incredible bull market we’d all become rather too comfortable with, or will buying now result in tears and tantrums a few months down the line?
Here’s what I think we need to be asking ourselves.
1. What’s driving this ‘bull market’?
Naturally, there are a few things that have caused this incredible rally in stocks.
First, there’s the financial support instigated by governments around the world in the wake of the pandemic. The ‘whatever it takes’ message has hit home with employers and investors and, for now at least, they like what they hear.
Second, the coronavirus finally looks to be losing its grip. The number of people testing positive and/or dying has thankfully reduced as social distancing measures and lockdowns appear to have had the desired effect.
Third, the gradual lifting of restrictions has brought with it an inevitable wave of renewed optimism, particularly from those who think they were too draconian anyway, or simply want a proper haircut.
Fourth, the severity of March’s crash meant a big bounce was always possible. When everyone in the market seems to agree on something, you can be pretty sure it won’t last!
All this is well and good. The more important question for me, however, is whether the rally is sustainable.
2. Can it last?
Here’s where I start getting gloomy. Regardless of the reassuring platitudes made by those in charge, the financial support provided simply can’t last forever. Moreover, the world is still facing a significant global recession. Many companies will still go to the wall and many jobs will be lost.
We also need to look at who’s buying stocks right now. Based on what we’re hearing from the US, it’s new retail investors, not established professionals. This doesn’t make the former wrong, but it does make me suspect that at least a proportion of those buying now probably won’t be regular readers of company reports!
Knowing this, it’s worth questioning how many will be capable of holding their nerve when current expectations meet with hard economic data. To date, we’ve only been able to estimate the financial impact of the coronavirus. Over the next few months, we’ll see whether these predictions are anywhere approaching accurate. If they are, markets may hang on to recent gains. If theyre not, the recovery could be over.
Last, we need to consider whether the coronavirus will be gone after only a few months. As far as this is concerned, all I know is I don’t know.
3. Should we avoid buying?
Absolutely not! I’m a fan of buying whatever the economic weather, so long as I know I’m investing for years and my holdings are of sufficient quality. I’m talking about companies with great brands, big market shares, strong management, sound balance sheets, and large operating margins.
Having said this, I’m also reminding myself that no company is worth buying at any price. So, before clicking that ‘buy’ button, I’m thinking about whether the renewed market optimism is already priced in. For some stocks, I really think this is the case.
Bull market or bubble? My heart whispers the former. My head screams the latter.