October 21, 2020

Why are shares so cheap?

On 19th February, America’s S&P 500 stock market index closed at 3,386, after rising strongly since early 2019. It then fell, almost continually, until late March, bottoming out at just above 2,200.



Magnifying glass on charts


© Provided by The Motley Fool
Magnifying glass on charts


 

You don’t need me to tell you why. The Covid-19 coronavirus, which emerged in China in December 2019, was spreading around the world. Apart from China, nowhere – not even Italy – was in lockdown in mid-February. But the writing was on the wall, and markets were nervous.

Loading...

Load Error

 

So where is the S&P 500 now? The answer, as I write the words: 4% higher than that pre-lockdown peak of 19th February. Put another way, it’s up 59% since 23rd March.

And this is the broadly based, industrials-heavy S&P 500 we’re talking about. Not the tightly-focused (and fairly unrepresentative) Dow Jones, on which the media fixate. And certainly not America’s tech-heavy NASDAQ, which – by the way – is up 72% since 23rd March.

A tale of two countries

Contrast that with the UK.

 

Over in the United States, Donald Trump’s relatively miserly economic support measures have won few plaudits. With little notice, millions of workers found themselves out of work, with little state help to fall back on.

 

Over here, chancellor Rishi Sunak’s various job retention measures and support schemes have been widely praised, even by political opponents.

 

The recent ‘eat out to help out’ scheme has been a roaring success, filling pubs and restaurants with customers that few proprietors thought they’d see, just a few weeks back.

 

The FTSE 100, though, tells another story.

Stalled recovery

After bumping along more-or-less comfortably above 6,200 through the summer – it even hit 6,484 in early June – it’s now back below 6,000. As I write these words, the FTSE 100 is actually at 5,886: below 5,900, in other words.

 

Put another way, as in America, the Footsie bottomed-out on 23rd March. Since when, it has recovered to the glorious extent of 18%, on the basis of today’s 5,886.

 

A far cry from the S&P’s 59% surge. And an even further cry from the 7,674 it had reached in mid-January, before Covid-19 worries hit the market.

 

Put another way still, if UK markets had now recovered to same extent as America’s S&P 500, the Footsie would now be at 7,981 – a whisker short of 8,000.

 

Instead, it’s two thousand points lower.

The real economy

Yet is this relative gloom deserved?

  

Retail sales figures released on 22nd August show that retail sales volumes in the UK are now 3.6% higher than a year ago.

 

The Office for National Statistics affirms that retail sales have “regained all the ground lost during the height of the coronavirus restrictions as more stores open for trade”.

And according to analysts IHS Market, the UK purchasing managers’ index (PMI) is at an 82-month high, signalling the fastest rate of business activity expansion since October 2013.

 

I’m not going to repeat myself here.

 

Alright then, I am – and here goes: I for one haven’t discounted the possibility of a V-shaped recovery for the UK’s economy.

 

And if you actually look at the chart of the UK’s PMI – which correlates fairly well with GDP – that V-shape is exactly what you see. The stock market might be well below pre-Covid levels, but UK PMI certainly isn’t.

Opportunity knocks

So what does all this mean? I think the answer is this: the Footsie right now is under-priced. Certainly with respect to America, and – in my view – almost certainly with respect to the real state of the UK economy.

 

Economic recovery will be uneven, granted. Companies – and industries – are recovering at different rates.

 

More than ever, picking the right stocks matters.

 

But the bargains are there.

More reading

The post Why are shares so cheap? appeared first on The Motley Fool UK.

Video: Why the worst of the market sell-off may be over and how to play it (CNBC)

Why the worst of the market sell-off may be over and how to play it

UP NEXT

UP NEXT

Continue Reading

Source Article