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The US main equity market, the S&P 500 Index, has reclaimed its pre-coronavirus peak and is notching fresh records almost daily, yet many fund managers are not celebrating having ‘missed the rally’ being under-invested on virus concerns. 

Global stocks soared during the hottest August for decades. A sagging US dollar combined with fiscal and monetary stimulus, reinforced by the US Federal Reserve softer stance on inflation, helped to ignite a global equities rally during a month when traders would usually prefer to focus on the beach.

Indications that big global economies are on a recovery track after the pandemic-induced slump also eased investors jitters that dominated spring with the US Central Bank i.e. the Federal Reserve, continuing to drive up stock prices by committing to keeping interest rates at close to zero for a very long time.

But the bumper summer run has stirred concerns among some over the risks ahead and the gap between market valuations and the still fragile health of the global economy. The MSCI World Index of stocks in developing nations jumped 6.6 per cent in August, the sharpest rally for that month since 1986. The average move either up or down for over the past 44 years was half as big.

The broader all country World Index that includes emerging markets rose 6.3% in August.

The August gains were regionally diverse. Wall Street’s S&P 500 was up 7.2% having this month wiped out the last of the pandemic losses and stuck an all-time peak. Germany, France, Italy and Spain rose 4 to 7 per cent. Japan 8.2 per cent. China 2.6%.

One of the biggests individual stock gains was Telsa, Elon Musk’s electric carmaker, completed a 69% rally for the month. Its stock rising 477 per cent for the year!

Events to look out for:

Mid-September’s Federal Reserve meeting: Market participants will be awaiting to see whether the central bank will lay out more action or stimulus after Fed Chairman Jay Powell unveiled the Fed’s new approach to inflation, which allows for overshoots.

The second test would come in November with the US election. A very close result could be contested, resulting in political gridlock and a lack of policy action, potentially for months after the election. Investors may take some risk of the table i.e. reduce market exposure, ahead of the election.

Such pitfalls come as central banks and governments have already deployed unprecedented measures to steady the economy and financial markets that looked at risk of total collapse during February and March. The manoeuvres have pressed sharply on bond yields i.e. pushing yields to all-time lows and helped push up inflation expectations, especially in the US.

The combination has made high-grade bonds look less appealing, since they offer low or even negative returns.