Since around the 10th of March, the stock market has been rallying, generating an impressive performance of around 30% for the MSCI All Country World Index and, in the process, wiping out all the losses that had been accrued until now. The burning thought in most investors minds is if the bull run is a signal that the economy is out of the woods or if it is just another bear market rally, similar to the 5 that preceded it since the crisis began.
If we dig deeper by looking at sector performances, the markets seem to be suggesting that the recession may be entering its final phase. So far this year, the cyclical sectors, such as materials, consumer discretionary and information technology have significantly outperformed typically defensive sectors such as consumer staples, healthcare and utilities. It should be mentioned that the stock market is far from perfect as a leading indicator of the economy and that the current rally may just be reflecting a growing sense of optimism due to economic releases that are showing signs of improvement. Improvement does not necessarily mean that things are getting better, however. In the current context, it simply means that the deterioration is occurring at a slower pace. As a result, I would advise caution against the complacency that seems to be building up.
