The stock market has been on quite a roll lately. While it may not seem like it, there’s been a steady stream of increasingly positive outlook for the UK economy from financial institutions around the globe.
Fears of a recession are slowly dying down. And businesses have started to get back on track, with several firms inside the FTSE 100 and FTSE 250 reporting record revenue and profits. As a result, both of the UK’s flagship indexes are actually up by double digits since October 2022. And if trends continue, investors may soon enjoy the thrills of being in a new bull market.
In fact, that’s precisely what’s just happened across the pond. The S&P 500 has climbed roughly 23% since October last year, putting it back into bull market territory. And while there’s no guarantee it will stay that way in the short term, investors who ignored the pessimists and capitalised on cheap stocks in 2022 are probably grinning right now.
The calm before the storm?
In the short term, predicting the behaviour of the stock market is virtually impossible. The recent upward trend might well reverse in the near future. And that certainly seems to be the thoughts of several professional investors.
For example, the chief investment officer at PNC Financial Services Asset Management Group has described the current stock market as “behaving pretty delusionally”. And there is validity to such concerns.
Looking at government bonds, or gilts as they’re called, their yield curves remain inverted. That means short-term bonds are currently providing a higher payout than long-term ones. Under healthy economic and market conditions, it should be the other way around. And this pattern has historically been a precursor to economic downturns.
It’s also worth pointing out that the FTSE 100, FTSE 250, and S&P 500 are all weighted by market cap. Just a handful of large businesses are driving the recent upward trends. And if these stocks were to suddenly lose favour, a large chunk of those gains could reverse very quickly.
The stock market may continue to rally
An inverted yield curve is one of the most widely used indicators to predict a recession. Yet, there are plenty of examples where it hasn’t turned out that way. They are merely a reflection of investor pessimism. And while many investors might be fearful today due to short-term uncertainty, the last few months of economic data suggest this negative outlook may be unjustified.
Energy prices are dropping, allowing inflation to steadily cool down. This is paving the way for higher consumption, sparking new growth in the British economy. The latest forecast from the International Monetary Fund predicts a 0.4% expansion compared to initial expectations of a 0.3% contraction.
Forecasts need to be taken with a pinch of salt. But if this proves accurate, then the recent stock market rally might be here to stay despite what many doomsayers are spouting. In other words, a new bull market might be just around the corner.
