Stock indices from New York to Tokyo have pushed higher over the past month in the biggest August market bonanza in decades.
A sagging dollar has combined with sparks of fiscal and monetary stimulus — reinforced by the US Federal Reserve last week — to help ignite a global equities rally during a month when traders would usually prefer focusing on the beach instead of data terminals. Indications that major global economies are on a recovery track have also helped to ease investor jitters that dominated this spring.
The MSCI World index of stocks in developed nations jumped 6.6 per cent in August, the sharpest rally for that month since 1986. The average move either up or down for the gauge over the past 44 years in August is half that size.
“Fed officials continue to drive up stock prices by committing to keeping interest rates close to zero for a very long time,” Ed Yardeni of Yardeni Research said in a note on Monday, describing the current rally as “the mother of all melt-ups”.
The best performer in the index for the month was Tesla, which jumped 13 per cent to a new record high on Monday after a five-for-one stock split, to complete a 74 per cent rally for the month. The electric car maker’s stock has increased more than 495 per cent this year, adding US$389 billion ($577.6b) in market value to the company — more than the entire value of JPMorgan Chase, the largest US bank by assets.
Monday represented the busiest trading day for Tesla on record, with 115m shares changing hands — almost double the previous high. The blowout volumes coincided with a rush of trading disruptions at retail brokerages including TD Ameritrade, Charles Schwab and Robinhood.
The broader All-Country World index that also includes emerging markets gained 6.3 per cent in August, its best run on records stretching back to 1988.
The gains in August have been regionally diverse. Wall Street’s S&P 500 index is up 7 per cent, earlier this month having wiped out the last of its pandemic losses and struck an all-time peak. Markers tracking stocks in Germany, France, Italy and Spain have risen 4-7 per cent on a euro basis. In Asia, Japan’s Topix gained 8.2 per cent and China’s CSI 300 increased 2.6 per cent in local currency terms.
The month’s run comes despite Europe’s Stoxx 600 falling 0.6 per cent on Monday and the S&P 500 falling 0.2 per cent. UK markets were shut for a public holiday.
The bumper run for August has stirred persistent concerns among some analysts and investors over the risks ahead and the gap between market valuations and the still-fragile health of the global economy.
The “more positive market view about future growth and inflation faces two tests over the coming two months”, said Nikolaos Panigirtzoglou, strategist at JPMorgan in London.
He said the first would come in mid-September when Federal Reserve policymakers meet following last week’s Jackson Hole economic symposium. Market participants will be waiting to see whether the US central bank will lay out “more action or stimulus” after Jay Powell unveiled the Fed’s new approach to inflation that will allow for overshoots.
The second test, Panigirtzoglou said, would come in November with the US election. “A very close result is likely to be contested resulting in political gridlock and a lack of policy action, potentially for months after the election,” he said.
“The fact the odds of the two candidates are narrowing again towards 50-50 suggests that the probability of such gridlock is rising, which by itself raises the probability that some investors will take some risk off the table ahead of the . . . election.”
The potential pitfalls come as central banks and governments around the world have deployed unprecedented measures to steady the economy and financial markets that appeared to be at risk of total collapse during February and March. The manoeuvres have put sharp pressure on bond yields and helped to push up inflation expectations, especially in the US.
The combination has made high-grade bonds look less appealing because they now offer very low or even negative returns, pushing investors towards riskier assets such as stocks and lower-rated debt.
A quarterly corporate earnings season that was not quite as bleak as some analysts had feared, added to the more optimistic outlook.
Asian stocks on Monday were bolstered by data showing further improvement in China’s services sector, while Japanese equities recovered from declines last week.
Japan’s Topix index rose 0.8 per cent on local media reports suggesting Yoshihide Suga, an ally of Shinzo Abe who is supportive of his monetary and fiscal stimulus measures, would throw his hat in the ring to succeed the prime minister. Equities were also boosted by Warren Buffett’s Berkshire Hathaway unveiling a US$6b bet on Japanese trading houses.
Meanwhile, China’s official purchasing managers’ index for the manufacturing sector came in roughly in line with expectations at 51 in August, slightly below the previous month’s reading. Non-manufacturing PMI stood at 55.2 in August, up sharply from 54.2 in July.
Written by: Adam Samson, Hudson Lockett and Richard Henderson
© Financial Times