Equities have been booming since the beginning of March, with the FTSE 100 gaining nearly 25 per cent in just a few weeks.
However, investors are divided as to whether the rise in global stock markets is the beginning of a bull market, or just a bear market rally – meaning that the gains could be short-lived.
On one hand, there has been a spate of better than expected first quarter company results, while investors had hoped the worst of the economic decline may be over. But analysts warn that, with the reporting season almost over, there is little good news on the horizon to drive markets forward.
In fact this week brought a renewed spate of bad economic data. The Bank of England said in its inflation report that the economy could still be shrinking in 2011, while separate data showed the biggest quarterly rise in unemployment since 1981, to 7.1 per cent. This led markets to lose some gains. The FTSE 100 closed at 4348 yesterday, almost 3 per cent lower than last week.
Fund managers are therefore divided as to whether the earlier rises may just be a bear market rally.
For some, this view may provide justification for missing the strong recent performance. Many fund managers have stuck to defensives or cash, so have lost out on a potential 25 per cent rise in their portfolios.
“Clients want to be told it’s a bear market rally because they’ve missed it and have too much in cash,” says Clive Beagles, fund manager at JO Hambro. “The non-believers are sitting in quite an awkward space right now.”
But the non-believers argue that the bulls simply have an interest in encouraging investors to buy into their funds.
This makes it very difficult for investors to call the market. However, there are a few signs to watch out for.
“If you believe it’s merely a bear market rally, you have to look for signs of when it will run out of steam and triggers that will convince investors they were overly optimistic,” says John Ricciardi, partner at Iveagh.
One such sign could be a return of deflation. “We could get substantial negatives in headline consumer price inflation (CPI) reported in the next couple of months,” warns Ricciardi.
Another shock could be if the rate of economic decline starts to rise again – as happened in the second half of 2002.
But if this turns out to be the beginning of a bull market, it would suggest the underlying causes of the credit crunch have been successfully addressed, for example by government measures to buy toxic assets.
Riccardi is content that he missed the recent rally, pointing out that he also missed the crash of February, leaving the short-term movements to the traders.
“The reason we haven’t made the choice is that for us it’s not clear. It’s too early to tell,” he argues.
Whatever the outcome, many pundits will make the wrong call, says Adrian Lowcock at Bestinvest. “The balance between a bear market rally and the start of a new bull market seems to be quite evenly split, which means that many experts will be proven wrong.”
