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Taking a bullish cue from history

John Rosier addresses his underexposure to the US and explains his change of heart over where markets go next
Taking a bullish cue from history

The 3 June marked 50 trading days since the S&P 500 bottomed in March. The subsequent rally was the biggest 50-day rally since 1952. As John Authers pointed out in his excellent daily email, Points of Return, comparisons before 1952 are difficult as the stock market used to trade over the weekend. However, he added, there is a "fair chance that this is the strongest ever". The 50-day rally in the US up to 3 June was 39.3 per cent. The UK and other equity markets participated, but to a lesser degree. I hear this recovery described as the most hated in history. Many are bemused as to why markets are rallying in the face of such awful economic news.

 

Three factors have driven the rally. First, optimism grew that the coronavirus would be defeated. Second, a growing belief that government support measures would lead to a swift economic recovery. Third, monetary policy has led to increased buying of equities. Where else do you put your money in a world of very low nominal and real interest rates?

During May, the same factors that drove equities higher also led to a rapid recovery in the oil price. Well, that and an agreement from Opec+ to reduce production. Brent oil was up 41 per cent to $39.28 a barrel. In overseas equities, the Nikkei 225 and Russia were up 8.3 per cent, the Italian MIB up 6.7 per cent, the Dax up 6.6 per cent and the S&P 500 up 4.5 per cent. Gold also benefited from loose monetary conditions, with many fearing an eventual return of inflation. Gold hit its highest level in eight years, gaining 3.4 per cent to $1,704 an oz.

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