The post-pandemic stock rally doesn’t have a firm footing

The nickname “Most hated stock rally” was already taking rounds by the latter end of last year, which happened to be the tipping point of the longest bull run. A market correction was long overdue and the pandemic only acted as a catalyst. In short, a sell-off was expected even though not the kind we experienced.

However, the rally that followed the global sell-off has now trumped the longest bull run to capture the notorious title of the most hated rally. The S&P 500 index has jumped 45% and the NASDAQ 100 has gained 44% in a matter of just two and a half months, erasing almost all of the losses from the sell-off.

Too good to be true

The rally was mostly built on the Federal Reserve’s stimulus packages – which included slashing short-term rates and buying mortgage-backed securities – as well as lower-than-expected jobless rate data. While these measures are definitely good for the market in the long-run, investors seem to have taken them a bit too seriously. The underlying fundamentals continue to be debilitated and the possibilities of a second-wave of pandemic further fuel the market risk.

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Experts are baffled over the way liquidity has mounted, turning Nelson’s eye to the probable scenarios of insolvencies and credit crunch. This is probably the first time that the markets are taking macroeconomic risks lightly, and this could even force the Fed to backtrack on the proposed stimulus packages to contain the over-optimism.   

Take for example the curious case of the travel industry, which was one of the worst hit and the most likely to take the longest to recuperate. We even saw Warren Buffett dumping his holding in airline stocks at massive losses, considering the weak near-term fundamentals. However, aviation stocks shot back last week, riding on the wings of American Airlines (NASDAQ: AAL), which rose 70% in value before erasing some of the losses this week.  

The longer the bull rally goes, the higher the cautious investors should be. When the market offers indications of a bubble, it’s obviously time to slow down.    

The rally was driven by the company’s announcement that it was planning to fly more than 55% of its July 2019 domestic capacity in July 2020, as the demand for air travel is gradually increasing. The optimism was wide-spread across the industry with the US Global Jets ETF, which invests primarily in domestic flights, rising almost 30% during the same period.

While the rising air demand is welcome news, whether it calls for the kind of buoyancy we are witnessing in the market is questionable, especially with jet fuel once again witnessing inflation. Similar rallies were visible among casinos and cruise liners.

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Brace for a slow recovery

In a clear indication that recovery will be slow in the US, the Organisation for Economic Cooperation and Development (OECD) earlier today predicted that the US economy would contract 7.3% this year, though this will be followed by a 4.1% growth in 2021. This is on condition that there is no second wave of the pandemic. If the virus hits once again, we should brace for an 8.5% contraction this year and just 1.9% growth next year, according to the intergovernmental economic organization.

This is not to say that the V-shaped recovery is a clear case of another market downturn. Experts have been warning of the lack of underlying logic in the rally for almost a month, and yet the stock has continued north. However, the longer the bull rally goes, the higher the cautious investors should be. When the market offers indications of a bubble, it’s obviously time to slow down.  

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