The week to Tuesday’s close saw the UK FTSE 100 Index gain 0.4%, the US S&P 500 Index gain 0.9% and the Euronext 100 add 0.3%. Gains over the past month are 1.9%, 4.3% and 5.1% respectively.
It is often said that ‘Bull markets climb a wall of worry’ and this one is no exception. Readers can hardly have missed the rise in Covid-19 infection rates reported in those US states that exited lockdown early or the policy reversals that have led to bars and other non-essential businesses closing again. Globally the news is similar, suggesting that after the initial sharp bounce back from the March lows the speed of the economic recovery will be hampered by the limited re-imposition of lockdowns and by lingering fears of Covid-19. With both the risk of serious implications on infection and the discretionary spending power of the over-fifties typically higher than the general population, those lingering fears will have a disproportionate impact on the recovery.
The UK government’s decision to remove Chinese telecom giant Huawei’s technology and products from its new 5G networks by 2027 are a local manifestation of a rise in global tension over the past year that seems unlikely to diminish, whoever wins the US presidential election in November. The US withdrawal of ‘special status’ from Hong Kong, treating it the same as the rest of mainland China, is another step in the process of de-globalisation, where companies reverse decades of off-shoring operations and either bring them home or relocate to culturally-aligned regions.
For now neither seems of great concern to investors, who remain confident that the world’s central banks will ‘do what it takes’ to support the economic recovery. And there is more they can do. While limited to bonds in the UK, US and Europe – effectively reducing the yield on them and the cost of debt – support for asset prices in Japan has extended to buying the stock market. With interest rate a key input to valuation calculations and lower rates justifying higher valuations investors largely view downside risk as limited. While such apparent complacency is always a danger, it is not hard to see why concerns over the speed of recovery and decaying international relationships are not causing more weakness. For now at least, it looks like we will continue to climb the wall of worry.