As shares surge, what next for this stock market rally?
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These past five weeks have delivered a blow to global investors. After hitting a record high on 16 February, the FTSE 100 index has taken a dive. Meanwhile, the US S&P 500 index also headed south. But after a shaky start on Monday morning, a stock market rally has brought relief to investors.
Down go UK shares and US stocks
At its all-time high, the Footsie peaked at 8,047.06 points on 16 February. By 8.30am on Monday, it had crashed to 7,238.23 — a plunge of almost 810 points. That works out to a loss of 10% in under five weeks. Ouch.
On the other side of the Atlantic, the S&P 500 index hit its 2023 peak of 4,195.44 points on 2 February. At its March low, it dipped to 3,808.86 on the 13th. That’s a decline of almost 390 points (-9.2%) in under six weeks.
A new stock market rally?
Clearly, investors have been ‘buying the dip’, as stock markets have rebounded this week. As I write, the Footsie has just closed on Tuesday at 7,536.22, up almost 300 points (+4.1%) in under 48 hours.
In the US, the S&P 500 is currently hovering around 3,978.55, adding almost 170 points since its 13 March low. But this gain of 4.5% in eight days isn’t so bullish as to have me excited at the thought of a new bull market.
Will this rebound continue?
As a maths and physics geek, one my heroes is Niels Bohr, Nobel laureate in Physics and a founding father of quantum theory. One quote often attributed to Bohr reads: “Prediction is very difficult, especially about the future”.
As the future is essentially unknowable — and I possess neither a crystal ball nor tarot cards — I am unable to forecast market movements. That said, it’s clear to me that share prices are being pulled this way and that by FUD — fear, uncertainty and doubt.
Of course, investor sentiment is key to what might follow next. As one old City saying goes: “Markets climb a wall of worry” — and investors are rightly anxious now. After this week’s relief rally, investors may feel less shocked, but it’s far too early to be complacent.
In short, I can’t say which way share prices will trend over the next few weeks. However, I’m confident that they will remain volatile until this new banking crisis is stabilised.
The FTSE 100 looks cheap to me
In my view, US stocks don’t look particularly undervalued right now. The S&P 500 trades on a price-to-earnings ratio (P/E) of nearly 18, with an earnings yield below 5.6%. What’s more, the index’s dividend yield is low at just 1.7% a year.
On the other hand, the FTSE 100 trades on a P/E of 11.3 and an earnings yield of 8.8%. Also, it offers a cash yield of around 4% a year. Then again, I expect America’s economy to be much stronger than the UK’s in 2023-24, making this value comparison less clear-cut.
Summing up, I’m expecting share prices to ride this roller-coaster for some time to come. But experience has taught me that buying discounted shares from panicked investors has been a successful strategy in the past. So when I have fresh cash, I will buy more stocks on sale!