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Leading City analysts shrug off poor growth figures and fears of swine flu pandemic to hail surge in equities as end of recession
A surge in equities which has seen share prices rise more than 20% since their trough in early March will put one of the City of London's oldest pieces of homespun wisdom to the test when a new month's trading begins tomorrow.
Judging by the way in which those eager to pick up stock at bargain prices have been shrugging off every piece of recent bad news, they have no intention of listening to those who say "sell in May and go away". Less than two months after the world's bourses were gripped by existential despair, there is now talk of them being on the brink of a new bull market.
In the past week, the optimists have shrugged aside plenty of bad news – the growth figures from the US and Britain, the potential swine flu pandemic and unemployment in the eurozone at a 44-month high – to power world stockmarkets to their highest level in four months.
Mike Lenhoff, chief strategist at Brewin Dolphin in London, said the reaction of the markets was significant. "Equity markets are paying far more attention to forward-looking indicators, such as various measures of business sentiment, a number of which have been better than expected, and far less attention to backward-*looking numbers. Two good and very recent examples of the latter are the US and UK first-quarter GDP [gross domestic product] figures, both of which were worse than expected and both of which the markets promptly dismissed."
There is a precedent for looking forward rather than back. In 1982, when the US economy was in deep recession courtesy of Paul Volcker's strong anti-inflationary measures, share prices started to rise; although few would have thought so at the time, the rally developed into the longest and biggest bull market there has ever been.
Sensing that history may be about to repeat itself, some investors are keen to join the party early.
Anthony Bolton, president of investments at Fidelity International, said on Wednesday: "All of the things are in place for the bear market to have ended." Speaking on Bloom*berg TV, he added: "When there's a strong consensus, a very negative one, and cash positions are very high, as they are at the moment, I'd like a bet against that."
Investors who caught the tide at its maximum ebb in early March have seen some impressive returns. The share price of Barclays has risen almost six-fold to 280p since its trough of 51p and Crispin Odey, of Odey Asset Management, said the wipe-out of so much capacity among lenders had left those institutions still standing able to widen their profit margins.
"Opinion is divided over whether this is a bear market rally or the beginning of a new bull market. I think it has the chance to be a new bull market," said Odey.
Despite the buoyant mood of recent days, there are still plenty of analysts willing to point out that some of the most impressive increases in share prices happened between 1929 and 1932, a period when the Dow Jones industrial average dropped by 89%.
George Magnus, senior economic adviser at UBS, gave short shrift on Wednesday to those eager to call the end of the recession and the return of the good old days in the financial markets. The green shoots the bulls were getting excited about, he said, were the result of the end of a savage period of global de-stocking and the limited impact of higher borrowing rather than the increase in capital formation necessary for a sustained recovery.
"Second, a sustainable expansion needs a very substantial building block to fall into place. The precondition for this is financial stability. By this we mean viable, profitable banks that do not depend on state life-support for their funding and capital needs, and two-way markets that work within the context of orderly risk premiums."
The gap between the bulls and the bears is wide. As Lenhoff said, the increased appetite for risk among bulls is based on a belief that policy stimulus will not only work but is already working. The bears think this is something longer, deeper and more fundamental than any of the previous post-war recessions. The next six months will determine who is right.
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