Markets are red hot right now. In the frenzied month since Biden’s presidential victory, the elusive vaccine has moved from pipe dream to reality, and the announcements of aggressive, extensive fiscal and monetary stimuli packages have intoxicated investors. Evidence of a global reflation trade picking up the pace is emerging in major and developing economies, as markets become increasingly bullish.
In November alone, the FTSE 100 Index climbed approximately 15 per cent. The S&P 500 Index appreciated by 11 per cent, and the EURO STOXX 50 Index jumped by over 19 per cent. In other words, investors across the globe had a pretty good time in November. In what has been coined by some analysts as an ‘everything rally’, virtually no corners of the stock market have been left untouched. European banks, airlines, small US equities, hotel groups and even cryptocurrencies have all seen gains. Airbnb’s recent IPO resulted in a tripling of its value to over $100bn on Thursday, in a display of soaring market hubris.
The so-called ‘blue wave’ win is looking more like a blue ripple. However, at least in terms of global markets, this is looked upon favourably. A divided Congress will likely result in no major tax reforms or sizeable changes in regulation for big tech or big pharma. Gridlock equals Goldilocks, as investors put it. But is market exuberance misplaced?
According to the IMF, the world economy is set to shrink 4.4 per cent this year, a decline not seen since the Great Depression. Stateside, pandemic-related deaths and cases continue to spiral, as the US fails to grapple the virus. Any delays in implementation or resistance towards mass vaccinations early next year will hamper a smooth reopening of economies. Closer to home, the prospect of the UK departing the EU without a trade agreement becomes more and more likely. UK lenders such as Barclay’s, Lloyds and NatWest all slid over 3 per cent amid choppy trading on Friday.
Perhaps even more concerning, US valuations have returned to levels not seen since the January 2000 dotcom bubble. Torrid, myopic investors risk betting feverishly on stocks as an exercise in catharsis; to do so puts markets at risk of momentous price corrections, yet again. Whether we are in ‘full bull’ stage or ‘early bubble’ remains to be seen. Buyers of the global reflation trade may soon face an uncomfortable reckoning.
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