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U.K. Market On Firmer Footing

By Andrew LaneStock MarketsFeb 26, 2021 05:53AM ET
www.investing.com/analysis/uk-market-on-firmer-footing-200563486
U.K. Market On Firmer Footing
By Andrew Lane   |  Feb 26, 2021 05:53AM ET
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The stock market hysteria in the US has been phenomenal. The NASDAQ 100 pre Covid crash was sitting around 9,700 whereas today it is hovering around 13,000 after dropping to just under 7000 in March 2020. Before Covid there were a lot of analysts calling for a big correction as the markets were overheated. Yet from the March 2020 lows to the recent highs of nearly 14000 that is a 100% increase in under 12 months. No time frame in history has yielded such an increase in this short space of time. The S&P 500 and Dow are also trading way above their pre Covid levels. Yet the FTSE100 is still north of 1000 points under the 2020 levels. Why?
 
The simple answer is the FAANG and tech stocks have attracted such attention generally that traders, professional, institutional and retail have piled in to the raging bull market. The Covid collapse has been one of the largest and quickest corrections in history. The much talked about Bear Market hardly got started. Tesla (NASDAQ:TSLA) has seen a nearly 900% increase in its share price in the same period. So how can an overcooked market keep going against a backdrop of diverging fundamentals? The answer is simple: it can’t.
 
The US stock market is so disconnected from economic reality it is almost surreal. Texas has just been shut for a week or so due to the deep freeze. That state alone contributes more GDP than 48 other states. The unemployment claims in the US keep going up, sectors such as retail and entertainment have been very hard hit. The high street is shut, over 180,000 small businesses have closed permanently. Households can’t pay bills, commercial properties are empty, rents are being squeezed, yet the stock markets keep going up and up.
 
The FED, Trump and now Biden have injected trillions into the economy in the form of monetary and fiscal stimulus. This has supported the stock markets no end. The buy the dip mentality still seems strong; however we are seeing right now is all the hallmarks of a blow off top. The higher it goes, the more severe the crash will be. This is backed up by every parabolic rise in history and is irrefutable.   
 
So when the US sneezes, is the UK now vaccinated? Metaphors aside the answer is yes, highly likely. The US is the most liquid of all markets, so it is expected we see reckless investors and sky high valuations. I’ve no doubt Wall Street sees this crash coming, and I’ve no doubt they aren’t that prepared for it. The UK on the other hand appears to be far better placed. The 50% Fibonacci retracement level of the FTSE100 collapse acted as resistance until it was finally broken in the new uptrend leg that started in November 2020.

The charts don’t show anything to get excited about, however this level is now acting as support. As long as this 6350 level holds the odds are the index will continue its uptrend, absent another black sawn event. The situation in the US is the opposite as investors have got twitchy recently due to the higher yield index we are seeing. Investor sentiment is positive in the UK. One thing markets hate is uncertainty, and we now have a set plan on how we exit this lockdown. Vaccinations are running at a far better rate than in the US and this has helped propel the situation. The biggest challenge we face now, is how to pay off the debt – a situation that is gravely worse in the US.
 
The UK debt has tipped the scales at 85% of GDP. That’s £2.4 trillion. The US however is a different ball game. That currently stands at just under $28 trillion and doesn’t include the soon to be signed off additional $1.9 trillion Biden stimulus plan. So how is this ever going to be paid back? Well the Fed is buying $12 billion a month in bonds via money printing or technically the euphemism of quantitative easing (QE). This programme of QE isn’t going to end any time soon, nor it seems are the stimulus packages. Biden’s view is America need to spend their way out of the debt, and he has big plans on infrastructure and green bills. All of this comes at huge costs. So with interest rates across the world likely to remain very low for some time (UK may well creep into negative soon) and inflation highly likely in the US due to the velocity of money soon to be unleashed following lockdown being lifted what is the answer? Higher taxes? Biden has already flirted with this idea, as has Boris. It will not be a popular decision if it plays out.
 
So where does that leave investors? If stocks are too expensive vs P/E ratios and unattractive at current levels where do people put their money? They do what they always do as history has proven and rotate into different sectors. So what sector thrives in the current climate with fiat currency being debased, low interest rates, QE programmes galore, loose monetary policy and an overheated stock market?

The answer is Commodities. They are the cheapest they have been against the S&P 500—the benchmark of stock markets—in nearly 100 years. Goldman Sachs (NYSE:GS) and many others have pointed out that we have entered a commodity supercycle, and you just need to look at the stats in the last year to see this looks to be true. With the majority of commodities being dollar denominated and the value of the dollar going down, industry picking up across the world and supply and demand shortages, then it makes perfect sense. They also act as an excellent hedge.    

This Covid crisis has impacted the world in a way that will be irreversible for some. Whilst the Q3 and Q4 figures for 2021 will likely show huge growth, we are a long, long way away from the pre Covid levels of output. Once that hysteria is digested, and the world works out how to re-employ the millions, kickstart the closed business and pay off the debt, it may set up a different view of consumer sentiment. The US markets are in way overcooked territory and will at some point come crashing back down, that is inevitable. The UK however one could argue has a far firmer foundation to deal with downward pressure on the economy. That is down to the stability it has shown against its greatest ally across the pond.  

U.K. Market On Firmer Footing
 

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U.K. Market On Firmer Footing

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