The Week: Have markets moved too far, too fast?

Markets have seen one of the quickest rebounds in history, to the extent that investors are starting to wonder whether they might have gone too far.


  • The S&P 500 now sits at levels last seen in November 2019
  • Markets appear to be betting that fiscal and monetary stimulus will be enough to support valuations as they are
  • The view that ‘something will turn up’ looks optimistic given the data

The S&P 500 now sits at just over 3,100. To put it in context, this was its level in November 2019. Can it be that a major pandemic, that has closed economies for months on end, can register as merely a blip in financial markets?

Investors have started to worry that markets, in their usual sunny optimism, may have over-reached themselves. It is perhaps particularly troubling that markets have moved so much higher when there are a number of major industries in such distress: BP’s share price is down 37% over the past 12 months, for example. For the market to be moving higher in aggregate suggests there must be some irrational exuberance elsewhere.

Markets may be betting that the amount of liquidity pumped into markets through fiscal and monetary stimulus will be enough to push them to ever higher levels. Certainly, where companies still have reasonable earnings, the lower discount rate has made those earnings more valuable and supports some appreciation in share prices.

However, it is still difficult to see why markets are moving higher. There is little evidence of a V-shaped recovery and investors can't bet against a depression. Some economic figures have improved but remain at historically low levels. UK services PMIs, for example, rose from 27.8 to 29, but given that any level below 50 indicates contraction, this is hardly something to cheer over.

At the same time, it is difficult to ignore the various looming geopolitical crises. The US is in economic and social turmoil at a point where the world badly needs its leadership and economic might. China is flexing its muscles over Hong Kong and reinvigorating its trade spat with the US. Domestically, we still have Brexit round the corner, ready to dent any nascent UK economic recovery.

Another problem is that investors cannot possibly make a judgement on the levels of corporate earnings. If these disappoint, markets look vulnerable to setbacks.

Markets appear to be operating on the cheerful assumption that ‘something will turn up’ - a vaccine, a treatment or just a general disillusionment with lockdown. This is possible and may be more likely than the relentlessly gloomy prognoses trotted out by the WHO and government ministers. However, it is a risky conclusion given the evidence.