The Nasdaq (^IXIC) hit a new record high on Monday as investors bet on swift economic recovery, with a surge in technology and communication stocks but greater caution in European markets.
The S&P 500 (^GSPC) also reached its highest point this year and Asian stocks rose overnight as a rally continued to gather pace from the lows of mid-March, when coronavirus fears hammered stocks.
The rally has taken many by surprise given the grave economic damage sparked by the pandemic, including more than 42 million unemployment insurance claims in the US. Many analysts warn of a growing gap between the market recovery and the real economy, downbeat over companies’ earnings prospects with economies still hobbled by COVID-19.
But the rally gained fresh momentum after a surprise jump in US employment data on Friday, and signals on Monday the Federal Reserve’s loan schemes could be extended to more firms.
Neil Wilson, chief market analyst for Markets.com, said it “looks like a mad fear-of-missing-out trade.” Investors appeared to brush off Fed chair Jerome Powell’s warnings over a second wave of the virus and the US downturn being officially declared a recession.
The Nasdaq composite index closed 1.1% higher on Monday, marking a 44.7% rise since its 23 March bottom, according to Reuters. The S&P 500 was up 1.2% on Monday, and the Dow Jones (^DJI) up 1.7%. Asian stocks also mostly rose overnight, with the MSCI index of Asia-Pacific shares outside Japan (AAXJ) rising for a ninth trading session in a row.
George Ball, chief executive of SMH Group, struck a cautious tone, suggesting 2021 corporate earnings were likely to be “much lower” than consensus and markets’ next move likely to be downwards.
Wilson also said stocks looked “very richly priced” unless earnings bounced back significantly faster than consensus expectations. “It’s remarkable equity markets can be this stretched on such a catastrophic economic contraction — but that is what unlimited Fed liquidity does,” he noted.
But Brent Schutte, Northwestern Mutual chief investment strategist, told Yahoo Finance’s The Ticker investors were looking beyond much of the backward-looking economic data. “It’s looking forward to a better future, it’s reflecting the fact that we’re opening large swathes of the US economy without significant spikes in cases.”
The fresh optimism was not enough to push up leading European indices on Tuesday morning. Germany’s DAX index (^GDAXI) slid 1%, Britain’s FTSE 100 lost 0.6% (^FTSE), and France’s CAC 40 (^FCHI) slid 0.7%.
It came as fresh data showed German exports plummeted much more than expected by economists in April, down 24% in their steepest decline in three decades. Cigarette giant British American Tobacco slid after warning COVID-19 would hit sales, and banking stocks also dragged indexes lower.
Wilson noted investors in European markets, with fewer tech giants than US indices, seemed unsure whether to follow the US higher or “show some more restraint given the economic uncertainty.”
Futures also pointed to a lower open in the US on Tuesday. S&P 500 futures (ES=F) were trading 0.9% lower, Dow Jones futures (YM=F) were down 1.1% and Nasdaq futures (NQ=F) were 0.5% lower at around 5.25am eastern time.