The Surge And Pause Explained

Maarten Mittner sheds some light on why investors should be cautious of climbing in now that markets are at improved valuations.

- Maarten Mittner

Recent global market movements have shown that the most dangerous moment is not when shares hit rock bottom. It is when shares recover, and the momentum cannot be sustained. Global markets started to climb at the end of May following the rout earlier in the year and continued their remarkable recovery into June. At the end of the month markets started to reflect daily record losses again as the fears of a second wave of the pandemic later in the year overrode optimistic views of a V-shaped economic recovery. However, markets soon stabilised at negative single-digit levels for the year so far, still a remarkable recovery compared with the March rout.

Surprise was expressed at the initial swift recovery, given the generally dire economic data, with the job numbers in the US a remarkable exception. The expected lower economic growth did not justify the market’s optimism, some pundits said.

Although markets at times appear to be irrational, they act quite rationally most of the time. The reason being that markets look ahead, and not at what had happened or what the present conditions indicate. The renewed introduction of stimulus measures by central banks and governments, as well as the relaxation of stringent lockdown measures, all appeared to be rational reasons to support the recovery.