Is now the time to buy British Airways?

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.

Recent sector rotation

UK investors (just like our American counterparts) need to appreciate that risk appetite has returned. The sense that the worst of the economic downturn is now in the past led to a strong start in June. This followed back-to-back monthly increases in April and May.

And yet we are still in a global pandemic situation. To some investors, none of this makes sense, to others it seems that they don’t care. But the market continues to creep higher. We must accept that this is a one-of-a-kind market. We should also appreciate that no one honestly knows how this will play out.

For all the concerns about how the underlying economy is looking, this period saw the S&P 500 have its largest 50-day rally in history. And if similar rallies in the past are anything to go by it could be positive for the market going forward but you have to take this with a big pinch of salt. This could still turn out to be the biggest dead cat bounce of a generation.

Largest 50-day gains ever (greater than 20%) on S&P 500

The buoyant performance has not been solely the preserve of the US and UK market. Investors have digested the decisions by the European Central Bank to deliver further stimulus to its battered economy, and accordingly bid up stocks in European markets. The ECB said it would expand its Pandemic Emergency Purchase Program by EUR600bn, extending the program until June 2021.

Once in while the market has woken up to macroeconomic realities and has sold off accordingly. For example, stocks were weaker on news of another 1.9m US workers applying for first-time unemployment benefits in the week ended 30 May.

But the market also continues to embrace what can only be viewed as “relatively” good news – data releases that are not as bad as economists have predicted. Non-farm payroll data, for example, showed that the US economy added a surprise 2.5m jobs in May. The unemployment rate also fell to 13.3% from 14.7%, even though the Bureau of Labour Statistics said the rate would have been 3 points higher if households had answered their forms correctly. This compared with predictions for a loss of 7.25m jobs and a May unemployment rate of 19%.

These are confusing times for UK investors. Market behaviour doesn’t appear rational on the surface. After all, we are yet to see the full painful fallout from the Coronavirus. Still, that does not mean that money can’t be made while we wait for the stock market to come to its senses.