The US dollar fell 0.5% on Tuesday to a two-year low against a basket of half a dozen peers
The sharp climb in US markets has rekindled fears about a disconnect between Wall Street and Main Street © REUTERS

Wall Street’s benchmark stock index struck an all-time high on Tuesday, having rallied more than 50 per cent from the darkest days of the coronavirus crisis, despite persistent investor unease about the US economy.

The S&P 500 index touched an intraday high of 3,395, eclipsing its previous record hit in February — a month before coronavirus fears sparked a crash in global markets. By ending up 0.2 per cent on the day, it also set a closing record of 3,389.78.

The sharp rebound in US stocks over the past five months has rekindled fears about the disconnect between Wall Street and Main Street, given the huge economic damage inflicted by the pandemic, which has hurt the value of the dollar.

“We’ve seen an unexpectedly sharp recovery in the financial markets but maybe we haven’t seen the full effect on the real economy,” said Trond Grande, deputy chief executive of Norges Bank Investment Management, which manages Norway’s $1tn sovereign wealth fund. The rally has occurred at a time when the pandemic “doesn’t seem to be under control in any shape or form”, he said.

The record for the S&P 500 came as the US currency extended its latest declines into a fifth day, falling 0.6 per cent to a two-year low against a basket of half a dozen peers on Tuesday. Japan’s yen steadied at ¥105.37 a dollar, while the euro advanced 0.6 per cent to $1.194 and the pound added over 1 per cent to $1.32.

Line chart of US dollar index showing Dollar falls to two-year low

Investors suspect that even after trillions of dollars of support, the US central bank may still need to do more to help the world’s largest economy, which appears to be emerging more slowly from the pain of lockdowns than Europe.

The Fed is “working hand-in-glove with the government to make sure that funds are available to finance fiscal spending”, said Kit Juckes, a strategist at Société Générale. “When I look at it like that, the very least I should expect is that the Fed manages to significantly cheapen the dollar. In real terms . . . it’s still 25 per cent above 2011 levels.”

The slide in the dollar dents the gains that some foreign buyers of US stocks would otherwise have enjoyed, but the effects are uneven, bringing some relief to countries with large dollar-denominated liabilities, as the IMF recently highlighted.

US stocks have soared 52 per cent since the low they struck on March 23, fuelled by central bank and federal government stimulus, with the gains being led by the US’s biggest technology companies, including Apple, Amazon, Microsoft and Google parent Alphabet.

The concentration of gains in Big Tech companies has prompted concerns among some investors that the rally could be built on shaky foundations.

“It is not as if the entire market is doing fabulously well,” said Brian Levitt, global market strategist at Invesco. “What you do want to see is a widening of the breadth of the market, because that would suggest the US economy is staging a recovery.”

Tobias Levkovich, chief US equity strategist at Citigroup, said he was concerned that “investors have crowded into one area that might be ripe for some pitfalls”.

Almost half of fund managers in a survey released by Bank of America on Tuesday said stocks were in a bull market, with the proportion who believe this is a fleeting “bear market rally” shrinking from the previous month. Still, an increasing proportion of investors think that many key asset classes are now “overvalued”.

According to the survey, fund managers see a portfolio with equal holdings of stocks, bonds and gold as the most expensive since 2008.

“It’s hard to believe, but the 2020 bear market is officially over,” said Solita Marcelli, UBS Global Wealth Management’s chief investment officer for the Americas.

Additional reporting by Harry Dempsey in London and Hudson Lockett in Hong Kong

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