Frustrated investors jumped for joy this week, as the world’s stock markets leapt more than 5 per cent on the back of the U.S. election and vaccine breakthrough.
On Wall Street, stocks returned to record highs, while the heavily-bruised FTSE 100 gained more than £70 billion, giving savers hope things might finally be on the up.
So are investors right to sense light at the end of the tunnel? Or is this sudden reversal of fortunes all too good to be true? Here’s MoneyMail’s guide to what it might mean for your portfolio.
Biden bounce: Even before Monday’s vaccine rally, shares were on the rise after Joe Biden’s election win
Even before Monday’s rally, shares were on the rise thanks to what some investors were calling the ‘Biden bounce’.
Markets had responded well to news of a decisive outcome in the U.S. presidential election — and that the pro-business Republicans looked set to retain control of the Senate.
‘This makes it less likely that a Biden administration could move forward with the previously feared tax hikes,’ says Richard Hunter, head of markets for Interactive Investor.
While stocks would have been panicked by a drawn out result, most analysts figured markets had already ‘priced in’ a Biden win.
By contrast, the news about Pfizer’s coronavirus vaccine trial came as a surprise to the markets — and a significant one at that.
‘A successful vaccine has greater significance than the U.S. election as it would pave the way to restarting economic growth globally,’ says Russ Mould from AJ Bell.
He notes many of the best performing shares of the day were those that suffered the heaviest losses in the coronavirus sell-off.
Budget airline easyJet — which was relegated from the FTSE 100 in June after losing half of its value — gained 35 per cent. Conference organisers Informa rose 22 per cent.
Such dramatic one-day gains aren’t usually seen amongst blue chip stocks — but 2020 has been no ordinary year.
Breakthrough: ‘A successful vaccine has greater significance than the US election as it would pave the way to restarting economic growth globally,’ says Russ Mould from AJ Bell
Even so, investors should be careful about getting carried away with excitement.
As Boris Johnson made clear in his press conference, the vaccine isn’t ready yet — and may take many months to distribute.
Laith Khalaf, one of AJ Bell’s market analysts, says that investors should also remember that markets can be erratic.
‘Often the knee-jerk response of stock markets to big events, whether positive or negative, is an over-reaction, which is then tempered over time,’ he says.
While Monday’s gains were dramatic, investors should be sure to look at them in context.
In reality, the biggest story of the year is still the coronavirus crash — upon which stock markets fell more than 20 per cent.
Since then, we’ve seen shares zig-zag in value, often rising sharply on the back of good news, before slumping back down again.
In all reality, this is likely to continue — even if shares are slowly on the rise.
Could this time be different? Mr Mould points to some signs that the markets remain optimistic about the road ahead.
The price of oil, which plummeted in March, rose almost 10 per cent.
It’s particularly significant as it’s regarded as a sign of confidence in future economic activity.
Meanwhile gold, often regarded as a safe haven in troubled times, took another tumble – leading it some way off its summer high.
Mr Mould also notes that the big tech stocks — notably the famous Faangs (Facebook, Apple, Amazon, Netflix and Google) of Silicon Valley — slipped slightly.
These internet-focused stocks have boomed in the pandemic, reaching record values, and stand to lose in a return to normality.
‘While the tremendous vaccine result is likely to underpin markets from here, investors shouldn’t be too gung-ho with their portfolios,’ advises Mr Khalaf.
After all, despite the dramatic headlines, it can be very difficult (and extremely risky) to profit from sudden market movements.
Not only do most mainstream platforms charge small fees for buying or selling shares, they will typically process transactions at a set point during the day.
When share prices are moving so much throughout the day, that makes it difficult to predict what price you will ultimately receive.
Look to wider economic trends, rather than market volatility.
Mr Khalaf suggests that investors feeling optimistic about a recovery consider drip-feeding their money into the markets, thus limiting their exposure to any sudden shock.
He adds that investors with a higher tolerance for risk might want to consider ‘unloved’ areas of the market which may now stand to recover.
‘In particular, the FTSE 100 could stand to benefit as markets reappraise the prospects of the cyclical oil and financial stocks which make up such a large part of the index,’ he says.
Lindsell Train’s UK Equity fund has traditionally been a mainstream buy for FTSE-focused investors, but its popularity has slipped during the pandemic.
A £10,000 sum invested five years ago would now be worth more than £15,000 (before fees) — making it well-placed to benefit from any big recovery.