Tags: Coronavirus | stock | rally | end | rebound | sign

Signs Stock Rally Doomed to End After $21 Trillion Rebound

Signs Stock Rally Doomed to End After $21 Trillion Rebound
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Tuesday, 09 June 2020 08:24 AM

As a sense of euphoria sweeps through global equity markets propelling stocks to regain $21 trillion in value from a March low, the asset class is looking increasingly frothy.

While stock luminaries who had advocated for a bull zone look like winners in hindsight, the debate goes on about whether the rally is a bear market bounce, doomed to end. Asia ended the day up but off the session’s high, while equities in Europe slipped in early trade, with the Stoxx Europe 600 falling as much as 1.6%. It’s a similar picture for the U.S. market as S&P 500 futures were down 0.9%.

Global equities have climbed back to levels last seen in February, when the coronavirus began spreading rapidly outside of China. The 42% surge from a March low is the best advance over an equivalent time-frame since 2009 for the MSCI ACWI Index that includes stocks in both the emerging and developed world. The gauge is now trading at 20 times next year’s profits, the most expensive since 2002.

“This rally is a function of government support being thrown behind the economy,” said Paul Sandhu, head of multi-asset quant solutions and client advisory for Asia Pacific at BNP Paribas Asset Management. “There are key risks that could lead to more volatility ahead over the short term, which is why we continue to hedge our portfolios on the downside while still looking for opportunities to add risk for the medium to long term.”

So far bulls are in charge. U.S. stocks just crossed an important psychological milestone of recouping this year’s losses. Asia’s equity benchmark just posted its seventh straight day of gains, the longest streak in more than two years. And euro-area shares are on course for their best monthly gain since 2015.

Factors including a wall of money from the guardians of global economies, the easing of lockdowns and the shockingly positive employment numbers in the U.S. are drawing more buyers to participate, picking up cheaper sectors and adding more fuel to the rally. Yet caution still abounds with some investors increasing hedges for potential volatility ahead.

“The risk of a correction will rise if investors continue to price in a rapid recovery, especially for sectors that are vulnerable to another wave of infections or an escalation of tensions between the U.S. and China,” said Tai Hui, chief Asia market strategist at JPMorgan Asset Management.

In another sign that the rally is stretched, global share-price gains in the past month have purely come from multiple expansion as earnings forecasts have barely budged since May. Adding to that is the fact the MSCI world measure has been in overbought territory since the start of the month, with the relative strength gauge on the index reaching the highest since January, which is considered a bearish signal by some.

Meanwhile, speculative excess has surged to the highest in at least 20 years among U.S. options traders, a negative for stocks over the medium term, according to Sundial Capital Research Inc. And a time-honored strategy of hedging stocks with government bonds has become questionable now that bond yields have plummeted thanks to policy easing across the world.

“If everyone is holding stocks just to pass on to the next greater fool, and if the greatest fool is a central bank with infinite liquidity to buy them, then, yes, prices will keep going up,” according to a note from Rabobank on Tuesday.

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As a sense of euphoria sweeps through global equity markets propelling stocks to regain $21 trillion in value from a March low, the asset class is looking increasingly frothy.
stock, rally, end, rebound, sign
Tuesday, 09 June 2020 08:24 AM
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