The Straits Times says

Beware the lure of bear market rallies

Encouraged by record low interest rates, humongous fiscal stimulus packages and apparently cheap valuations after a brutal sell-off, some investors are aggressively wading back into stock markets. Singapore Exchange data shows investors poured $2 billion into stocks last month, 50 per cent more than in the previous month. In recent days, investor sentiment, including on Wall Street, has been buoyed by the slowing rate of increase in Covid-19 infections in the United States and parts of Europe. There are also expectations that social distancing measures, which have caused widespread economic damage, will soon be lifted in some parts of the world, as they have been in China and South Korea - although this is not an immediate prospect in Singapore. Signs of a possible agreement on oil production cuts between Russia and Saudi Arabia, which could lift oil prices, have also added to positive sentiment.

Stock markets have been yo-yoing up and down in recent weeks. The fact that major US indexes are now about 20 per cent above their March lows has prompted some analysts to suggest the bull market, which was so rudely interrupted in February, is now poised to return. But investors should be wary of such cavalier optimism. The battle against Covid-19 will be protracted and many areas of the world, including not only parts of the US, but also South-east Asia and India, are far from witnessing a peak in infection rates, let alone a return to normalcy.

Besides, a lot of economic damage has already been done and there is likely more to come. The world is, after all, in the throes of a synchronised global recession that economists now acknowledge is worse than the 2008 global financial crisis. Forecasts for second-quarter gross domestic product growth in the US are dire: US investment bank Goldman Sachs predicts it will collapse by 24 per cent, 21/2 times bigger than any decline in history. A bounce-back in the second half is far from assured. Jobless claims have already skyrocketed far beyond analysts' expectations. Across the world, including here, liquidations and bankruptcies are already running high. Consumer debts could also come under stress. What started as a health crisis is morphing into an economic, financial and debt crisis. Emerging market economies - including many in Singapore's neighbourhood - are especially vulnerable, given their high dollar-denominated debts and dependence on commodity exports and tourism. Share buybacks, which historically supported stock prices, are also unlikely to resume any time soon as companies conserve cash. Many have suspended their buyback programmes. It is unlikely that all these potential economic downsides that lie ahead have been priced in. Investors should therefore be cautious and not confuse temporary bear market rallies with a return to a bull market.

A version of this article appeared in the print edition of The Straits Times on April 11, 2020, with the headline 'Beware the lure of bear market rallies'. Subscribe