November surge

Extreme financial market behaviour repeats itself only when everyone who remembers the last time has hung up their boots. We are still a few years away from the retirement of the generation, but those of us for whom it feels like yesterday are thinner on the ground now. I’m not surprised that the talk has turned once more to market bubbles. Many investors today have never experienced the euphoria of a full-blooded melt-up.

November certainly felt close. When shares rise by 15pc in a month, as they did in Europe, something extraordinary is going on. And it doesn’t take long for word to spread. You don’t see many shoe-shine boys these days but, if you did, they’d almost certainly be giving you share tips as they buffed your brogues. The US$90bn flows into equity funds in just three weeks were the highest ever. Animal spirits are back.

For the first time since the financial crisis crushed investor sentiment for the second time in seven years in 2008, investors have started to show some genuine enthusiasm. The unloved bull market that dragged shares higher, almost grudgingly, has morphed in the past few weeks into something more festive.

While the action was confined to a handful of big US companies in one particularly favoured sector there were plenty of investors who had not experienced the dopamine rush of a share price that goes up day after day after day. Anyone who was active in the markets through the final months of 1999 will confirm that there are few more exhilarating feelings than making money for nothing other than being in the right place at the right time.

The broadening out of the bull market in November to the beaten-up parts of the market that were hammered during the early days of the pandemic has triggered the current euphoria. British Airways-owner IAG is 70pc higher than it was a month ago, Rolls-Royce 54pc up, boring old BT has risen 37pc, unloved fossil-fuel dinosaur Shell is 36pc better. If you haven’t made money recently, someone you know is telling you that they have. Optimism is infectious. So too is the fear of missing out.

All this has happened despite still ghastly headlines in the real world. Last Friday, new infections in the US topped 200,000 in a day, just a month after they exceeded 100,000 for the first time. All of Europe’s major economies are in retreat thanks to the second wave of lockdowns in the region. Christmas might turn out to be the super-spreader event that Thanksgiving is looking to have been across the pond. The global economy will have shrunk by more this year than at any time since the Great Depression.

So, it is reasonable to ask whether investors have got ahead of themselves. It would be remarkable if they had not, given the cocktail of stimulants markets have imbibed over the past month.

The first of these was already in place before November - co-ordinated, and massive, fiscal and monetary stimulus. Never before have central banks and governments acted in tandem in this way, not after the Japanese bubble burst in 1989, not after the crash or the credit crunch. What added fuel to this fire last month, however, was the appointment of Janet Yellen to head the US Treasury. Yellen and Fed chair Jay Powell playing tag will be a potent force in the months ahead.

The second key driver is the Goldilocks scenario of Joe Biden in the White House with just enough support in Congress to boost government spending but not quite enough to push through damaging tax rises to pay for it. Gridlock in Washington is good.

The third, and most powerful, boost has come out of the labs. Only widespread vaccinations can unlock the pent-up consumer demand and international travel that the economy needs to return to growth. The economic slump in 2020 has been savage but it can be reversed, if not overnight then within months. The 4.4pc fall in global GDP this year will be more than offset by the 5.2pc expansion the IMF has pencilled in for 2021. Corporate earnings, which ultimately drive share prices, will snap back next year and in 2022.

It is not hard to see why this unprecedented set-up should have fuelled November’s surge. A compelling new story, clear light at the end of the tunnel, policy support and a wall of money. Eeyore would be tempted to join in the fun.

One lesson from the years is that the time to be careful is when everyone else has thrown caution to the wind. The thing we should be most worried about today is the unanimity of the consensus about 2021. There are no dissenting voices right now - and that’s never a good sign. Sometimes it is better to travel than to arrive - finding the vaccine is one thing, distributing it to seven billion people another. The Democrats may yet clinch the Senate. Bond yields may rise as the spectre of inflation returns. Previous pandemics have hung around for years not months.

But another key lesson from 20 years ago is Keynes’s observation that the market can remain irrational for much longer than we can remain solvent. Sometimes, the best thing to do is to go with the flow. That was true in the late 1990s, when the FTSE 100 had risen six-fold in 15 years. It is even more so today when the UK market is lower than it was two decades ago.

Tom Stevenson is an investment director at Fidelity International. The views are his own. He tweets at @tomstevenson63.