If there was ever an example of the disconnect between Main Street and Wall Street, the stock market behaviour during the rising social unrest in the US exemplifies it. The stock market has risen against all the odds and this is not the first time that we are raising this as a red flag because many investors are clearly getting carried away.
We are speaking to more and more people here in the UK and it appears that common sense can no longer be taken for grant. Whilst we don’t wish to appear harsh the fact that more and more people can’t wait to invest despite the economic data painting a truly horrible picture, should be real concern for everybody.
You only need to look at British Airways (IAG) to see how ruthless this stock has become. It rallied by nearly 100% in less than 4 weeks thereby enticing investors into its lair only to collapse with little warning. This caught too many private investors with their trousers dangling sheepishly around their ankles. The question is now the time to invest again? And this story of do we buy or not repeats itself over and over again.
Despite a negative backdrop, stocks continued to rally hard even given the recent blip we saw. Optimism over economies emerging from coronavirus-led shutdowns was the key driver. The markets failed to be swayed by the protests over the police killing of George Floyd that ensured violence gripped cities nationwide. This was even after President Trump threatened to use the military to quell protests. Deteriorating US-China relations over the future of Hong Kong equally had minimal impact.
Mixed news on a potential vaccine also had little bearing. Dr Fauci, the White House health adviser, said he expects hundreds of millions of doses of a COVID-19 vaccine to be available in the beginning of 2021. But he also warned the vaccine might not provide long-term immunity.
In the face of all of this, and even with the corrections seen of late, the stock market has remained resilient. Those parts of the market most likely to benefit from the reopening of states led the charge. These were stocks left behind as the pandemic forced the shutdown. The likes of the banks, retailers and restaurant chain sectors could now bask in an environment of renewed positivity.
At the same time, we saw rotation away from areas that had been the biggest beneficiaries of the lockdown rules. Defensive sectors and work-from-home stocks, notably technology names, were losers. This is another key thing to consider – Sector Switching. This is one of the best way to generate capital growth from your investments rather than the traditional diversified approach to portfolio construction.