Rudderless after a rally, stock markets look for next catalyst

Global equity markets have shuffled up about 1% this month despite the world starting to re-open after the coronavirus-driven lockdowns and U.S. and European economic data showing glimmers of a recovery.

The sideways movement is in sharp contrast to the roughly 30% rally in late March and April, when investors were able to shrug off far more dire economic data and look towards recovery backed by government support.

In some ways, not much has changed in the world’s understanding of the coronavirus and its economic impact. Some investors, economists and public health experts have been warning for weeks that re-opening will be slow, vaccines will take months and the recovery will be prolonged.

And yet, investors appear to be taking heed only now.

In interviews, investors said the explanation partly lies in the failure of the market’s collective wisdom. Stock markets misread how fast growth may rebound. And now they need a new catalyst, such as a vaccine or substantial new stimulus, before they can decide whether to flee or hold the course. But it is proving to be elusive.

“Markets have essentially been range bound for more than a month now waiting for a new driver to emerge,” said Mohamed El-Erian, chief economic advisor at Allianz. He said that positive news on reopenings and vaccines were insufficient to compensate for the string of negative data and concerns about the sharpness of the recovery.

The market’s conundrum underscores a larger predicament facing global policymakers in the battle against the coronavirus. The $15 trillion-plus pledged in global stimulus inflated stock markets in April, as investors took heart that governments will not let the global economy completely melt down. But while the money kept economies afloat, it cannot engineer a recovery.