Investors and analysts are far from unanimous in agreeing whether the 10% rally in UK and US stocks over the past month is too much, too soon, though some are predicting further big gains.
The FTSE 100 on Friday was up almost 2% on the day and since the start of April has risen 18%, to stand only less than 10% lower than it started the year.
Across the Atlantic, the S&P 500 has enjoyed its best ever 50-day run and is now standing at less than a 5% loss for the year.
Jobs and other confusing data
Yet this is with companies slashing jobs on both sides of the pond, with UK companies announcing several thousand redundancies in the past few days and some economists saying unemployment is headed for around 10% in coming months.
The US had been predicted to see unemployment rise to well above 20% until Friday's non-farm payrolls report, where the jobs data was the biggest surprise in history. Economist Ian Shepherdson at Pantheon Macroeconomics said this is “likely is due to a wave of hidden rehiring”.
However, Friday’s latest UK consumer confidence data showed household sentiment is close to its all-time low, with a consequent impact on the outlook for the sort of spending boost that many companies need.
What about that virus?
So, while the stock market is always looking several months ahead, is it perhaps calling success too early?
The coronavirus has by no means peaked globally, with the pandemic only just getting started in many emerging market countries, such as Brazil and Egypt, and Florida even seeing the largest daily surge in new cases since March.
Twice as many countries reporting a rise in new cases over the past two weeks than have reported declines.
“One amazing point of this recovery is that it’s happened without a breakthrough in vaccines yet,” says analyst Marshall Gittler at BDSwiss.
“My impression is that investors are convinced a vaccine is coming eventually.”
“Of course, just because everyone believes something doesn’t make it true. We have no idea what’s going to happen in the future, because we’ve never seen a recession like this before.”
Nobel Prize-winning economist Robert Schilller wrote in the NYT recently that “we shouldn’t be surprised if we see post-pandemic economic weakness over the next decade.”
Not fully out of the tunnel
“Sometimes it is hard to tell whether the glimmer of light at the end of a tunnel is the sun or an oncoming train,” said Berenberg’s Kallum Pickering.
“While we are not fully out of the tunnel yet, we can see clear rays of sunlight,” he argues.
While global economic activity remains depressed, he said, the potential tail-risk that the COVID-19 pandemic and ensuing mega recession could morph into a financial crisis has “receded materially”, partly thanks to aggressive moves by central banks and governments.
Yes, unemployment has risen sharply and a “modest wave” of company defaults looks inevitable, he says these effects are “comparatively benign relative to the circa 30% collapse in economic activity between February and April and to what would have happened without the massive policy support”.
However, looking ahead, the economic outlook remains clouded, with the risk of a potential second wave of the virus and the resulting potential return of the nationwide lockdown.
Spending and investment could remain subdued if households and firms continue to save too much after the lockdown is eased, Pickering acknowledges.
Considerably more optimistic are analysts at Bank of America Merrill Lynch, who predict that European shares are likely to rise another 10% by the end of September.
“While some economic activity will not come back anytime soon, the broad-based lifting of restrictions nonetheless implies scope for a marked pick-up in economic activity,” the analysts said in a note to clients on Friday.
The bank’s analysts see banks and mining stocks as offering the greatest potential for a rebound from current levels.