SAME OLD STORY
The past few weeks have been very similar. The US market – powered by a weaker dollar, rock-bottom interest rates and a lack of viable investment alternatives – continues to surge ahead undaunted, setting a string of new records. No one is focusing on the bad news, whilst any sniff of good news is being used as a pretext for a continued bull market. Tech stocks are still leading the way. The Russell 2000, the flagship index of American midcaps, may be down 5% year to date but the Nasdaq 100 is up a staggering 38%. This powerful rally is being driven by just a handful of stocks. Nearly 50% of the appreciation by the S&P 500 (+9.9% year to date) can be pinned on the four heavyweights of the year: Apple, Microsoft, Amazon and Nvidia. Apple’s stratospheric ascent to the $2trn market-cap mark is alone responsible for 28% of the index’s progression!
The unconditional support of central banks, especially from the Fed, is still the powerhouse behind this market move. Fed chief Jerome Powell last week announced that the central bank would henceforth only aim to maintain an inflation target of 2% “on average”. This is tantamount to saying that interest rates will remain low for a long time to come.
In Europe, the confidence index has improved for the fourth month in a row. The market is awaiting the details of the economic recovery plans to be released in the weeks ahead. On Thursday, France is due to announce its €100bn splurge, with Italy and Spain unveiling details of their blueprints later. At this stage, tourism remains one of the worst-affected sectors on account of the pandemic. A recent report by the World Tourism Organisation showed that nearly 120 million jobs worldwide are threatened and the economic damage could stretch to $1trn dollars. More and more countries are enacting tit-for-tat quarantines on holidaymakers, which is making matters worse, especially in those countries for which inbound tourism represents a significant chunk of their economy.
Glancing over at China, we can see an economy that is faring relatively well, with growth in the service and construction sectors accelerating in August. At the same time, the pace of growth in the manufacturing sector remains virtually unchanged month on month. This key component of the Chinese economy is now back at pre-crisis levels despite some wide disparities in business performance. Everything depends on the type of industry, of course. In any case, China now knows that its fate hinges much more on domestic spending than in the past.
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