News analysis

Coronavirus pandemic-defying market bull run may not last

Analysts advise a defensive stance, note that downturn not comparable to past recessions

Stocks around the world shot up in a string of remarkable rallies last week, but these are dangerous times to be in the market.

Despite deep pessimism over the health of the global economy, the S&P 500, the broadest US blue chip benchmark index, last week posted its best five-day period in 46 years to enter a bull market - defined as a 20 per cent jump from a recent low.

Several markets across the world followed suit. Bourses in South Korea, the Philippines and Indonesia entered bull markets. Singapore's Straits Times Index rose 7.6 per cent last week - up about 15 per cent from the March 23 low.

Historically speaking, stock markets are forward looking and quickly embrace new facts and figures as they are presented, but they also tend to overreact in the short run.

It took the S&P 500 index just 16 days to tumble 20 per cent from a record high - the quickest descent into a bear market since July 1933.

In a further seven trading days, the index hit its March 23 low, down 34 per cent from Feb 19, before the fast and furious gains of last week. The S&P 500's virtually V-shaped move meant the coronavirus bear market that ended last Wednesday was just 19 days long - the shortest since a 15-day stretch in November 1929.

The obvious explanation for the sharp recovery is the apparent slowdown in the rate of infection in Covid-19 epicentres worldwide.

Daily cases peaked on April 3 and, in some places, have been declining since.

While the consensus is split, many analysts believe that just as markets panicked when the disease spread out of China to Europe and the United States, the recent recovery is also an over-reaction to the very first positive flip in the news flow.

Health experts across the world have appealed to governments and citizens to take seriously the lockdowns, and have warned that a premature withdrawal of containment measures could be disastrous, with a second wave of infections even more deadly than the first.

The longer the business and social shutdown stays in place, the more economic growth, company profits and jobs will be lost.

While China may have lifted most of its containment restrictions, the contraction in its foreign trade is set to continue through the second quarter as global demand remains depressed.

Data due this week is expected to show that both exports and imports will continue the decline seen in the first two months of the year, along with slides in industrial production, retail sales and fixed investment.

The risk is that investors who are jumping on the bandwagon of a premature market rally may get their fingers burnt when grim first-quarter economic numbers, corporate earnings and other financial data start to pour in.

However, it is worth noting that the recovery isn't all together without legs either.

Markets can definitely take some respite in the fact that some of the doomsday scenarios that looked quite possible last month did not come to pass, at least not yet. They include a precipitous collapse of high-yield bonds in markets from China to the US and a complete freeze of capital flows through the global financial system.

A lot of credit goes to the whatever-it-takes willingness shown by policymakers around the world who have been pumping trillions of US dollars worth of stimulus money into their respective economies.

The US Federal Reserve, for instance, surprised the market last Thursday by announcing a slew of new programmes aimed at lending out as much as US$2.3 trillion (S$3.2 trillion). The measures come on top of several other Fed initiatives, including plans to buy corporate bonds, investment-grade and high-yield.

Its earlier steps, particularly the arrangements with other central banks, such as the foreign exchange swap lines and a new temporary repurchase agreement facility for foreign and international monetary authorities, had already started to relieve the stress in global financial markets.

The increased availability of US dollars worldwide is easing both the credit crunch and the value of the greenback against other currencies.

The Singapore dollar, for example, closed 1.9 per cent higher to the greenback last week and, on an intraday basis, surged 3.7 per cent above the 1.4647 level on March 23 - the lowest point this year. The local dollar was expected to depreciate after the March 30 policy easing by the Monetary Authority of Singapore.

The Singdollar appreciation is just one example of how unorthodox Fed actions have allowed capital to flow smoothly, calming panicked investors and making way for risk appetite to return to global markets.

And probably the first to take advantage of the normalisation of credit spreads are institutional investors like mutual and hedge funds that are unlocking money from bond markets and ploughing it into attractively valued stocks.

Long-time investors understand that panic selling during crises also offers the best opportunities for those with cash in reserve.

The coming six to 12 months will bring extreme value to various oversold assets, regions and their currencies.

Looking from this perspective, the market is probably signalling that the worst is behind us.

But we have seen that sort of optimism before in times of crises.

In December 2008, the S&P 500 entered a bull market amid the global financial crisis but that didn't last long, with stocks hitting new lows within months. The index only started its 11-year bull run after it hit a historic low of 666 points in March 2009.

And declaring an index is in a bull market doesn't mean stocks can only continue rising.

Some analysts will not call it a new bull market until the S&P 500 surpasses its previous high of 3,394, set on Feb 19.

Most analysts are advising investors to keep a defensive allocation in equities. They believe the current downturn induced by a global health crisis is not comparable to previous recessions.

And seeing what lies on the other side of this crisis is not possible unless a reliable vaccine against the coronavirus becomes widely available - a prospect which for now appears to be several months away.

A version of this article appeared in the print edition of The Straits Times on April 14, 2020, with the headline 'Pandemic-defying market bull run may not last'. Subscribe