We can only assume, therefore, that available information does not extend to civil insurrection, rising bankruptcies, and a double-digit hike in the US unemployment rate.
We know that the performance of the stock market and that of the wider economy do not always coalesce. And given the one-off nature of our current woes, any arguments over what constitutes a leading or lagging market indicator are largely redundant anyway. Conventional wisdom no longer applies when governments have effectively shut down huge swathes of the economy. Even during wartime, productive capacity was merely transferred, rather than closed outright. And some of the volatility that we are seeing could even point to the increasing influence of algorithmic trading.
If you were seeking to justify, or, at least, explain why the index has been defying gravity against this economic backdrop, you could point to the underlying sector weightings: tech stocks 25.7 per cent; healthcare 15.4 per cent; communications 10.8 per cent; and financials 10.6 per cent. It is perceived that these sectors are best placed to ride-out the economic turmoil, albeit for differing reasons, while two of the more vulnerable sectors – energy and real estate - account for just 5.3 per cent.
Though movements have not been quite so dramatic closer to home, even our oil-slicked FTSE 100 benchmark has rallied, having lost a third of its value during the March sell-off, before recovering to within 16 per cent of its reading in the last week of February. You could argue that this suggests that the FTSE 100 constituents are more realistically priced then their US counterparts, but this partial recovery is even more perplexing when you weigh up the collapse in crude prices set against the 15.5 per cent combined weighting of Royal Dutch Shell (RDSB) and BP (BP.).
The bounce-back represents the fastest bear-market low to a bull market since another spike in valuations that occurred at the tail-end of 2008. This amounted to a rather brief interlude during a long-run bear market. History suggests that we are following suit. The average bear market on the S&P 500 has lasted for 10.7 months, with an accompanying loss of 34.3 per cent. There is every chance that the index will re-test its March lows.
Sudden price surges are often characteristic of long-term bear markets, as trading tends to be extremely volatile. Indeed, the VIX remains above its rising 200-day moving average, which reflects the potential for a significant fall in valuations.
Bond yields are thought to be a meaningful leading indicator of the equities market because traders gauge trends in the economy and then speculate accordingly. But it has been difficult to get a steer from bond markets this year. An inverse relationship exists between interest rates and bond prices, and it was in evidence during the initial sell-off in the first quarter, but it broke down as more and more capital was pulled out of mutual funds, which resulted in a separate sell-off in the bond markets to generate sufficient liquidity to meet redemptions. Some also take the view that bond yields tend to reflect conditions in the wider economy, whereas equities are more narrowly focussed on corporate earnings.
Experience also shows that stock markets have tended to perform strongly when the economy registers even minor improvements after having tanked. However, you suspect that the focus on a handful of tech giants is masking the underlying problems facing the market. It is simply impossible to predict the effect that the current lockdown will have on aggregate demand going forward.
Now is not the time to buy back into the market. Keep your powder dry and wait for the next down leg. Any impulse to enter the buyers’ circle is likely the result of cabin fever. Stay at least two metres away from your stockbroker, or at least until the leading indices fall prey to the virus again.
