Global stock markets have rallied sharply in the last two months, at least in most cases. The S&P 500 was tremendously oversold, and over 95% of the members of the index were in oversold territory after the Christmas Eve selloff. I expected a rally from that point, but the strength of the rally has been a little surprising.
If you read about the market regularly or listen to investment news, you will hear people talk about a v-bottom. The dramatic fall in December and the dramatic rally since Christmas Eve have formed what I would call the epitome of a v-bottom.
The rally is getting to the point that I am worried that it is getting overdone. The first part of the rally was fueled by bargain hunters taking advantage of the oversold levels on most stocks. The second half of the rally seems to have been fueled by the hope that a deal between the U.S. and China was imminent. My concern is that when there is an announcement of a deal, the gains will already be baked in and there won’t be anything left to keep the rally alive.
What confounds me is that British stocks have rallied along with U.S. stocks. Since the close on Christmas Eve, the S&P has rallied 19.3% and the FTSE 100 is up 13.7%. So the British market hasn’t rallied as much as the U.S. market, but it has rallied sharply.
Looking at a weekly chart of the iShares MSCI United Kingdom ETF (NYSE: EWU), we see that it has also formed a v-bottom. In fact, the EWU has rallied above the high in the fourth quarter. The S&P hasn’t managed to move above its fourth quarter high just yet.
While I am moderately concerned about the rally in the U.S. market, I am more concerned about the rally in the British market. With so much disarray going concerning the government and Brexit, how in the world have British stocks managed to keep up with other world markets?
Prime Minister Theresa May saw her Brexit proposal rejected by Parliament and she has lost the support of many in her party. The exit is scheduled for March 29 and there still isn’t a plan for the Brexit. May has stated emphatically that she opposes the idea of delaying Brexit, and many fear that a no-deal Brexit would be catastrophic for the British economy.
The European Union is Britain’s largest trading partner and if there aren’t any plans on how trade between the two parties will work, Britain could be working from a weakened position in any negotiations. May is scheduled to present her revamped exit plan to Parliament on March 12 with the vote on the plan scheduled for the next day. Despite her opposition to delaying Brexit, May has also proposed a vote on delaying Brexit if her new plan isn’t approved. That vote would take place on March 14.
I have been around the market for a long time—studying, analyzing, and writing about it for over 30 years. One popular cliché is that sometimes “the market likes to climb a wall of worry.” That seems to be what is going on with British stocks right now. There is plenty to worry about with the British political environment and the total mess that Brexit has become. But I don’t know that the current wall of worry in Britain is one that the market can keep climbing.