This is a curious market, swinging between pessimism and optimism on the thinnest of data. Is this rally for real, or just more rotation? Is the UK really breaking free?

Certainly, if you include dividends (and it is odd that we don’t in the UK; others do) there is indeed something moving in the UK. But is it more than one big takeover bid and a rising dollar, this time?

While the continued weakness in the AIM smaller companies index in particular, but also setbacks in some Emerging Markets (like Brazil) suggest this is indeed just jousting.


What can we see?


Markets have had a couple of sudden, dramatic jolts upward in the last eight months. Some ran up hard from October, while the FTSE sat trading sideways till mid-February (at 7,500) then launched upwards climbing almost a 1,000 points to now, and along the way had a shedload of ex-dividend dates to battle with, adding yet more to that return.

Others like the NASDAQ began their charge earlier, in the last week of October, then eased off in April, where they peaked and went sideways. The Mumbai SENSEX did almost the same, and again has been sideways since April. While the Japanese TOPIX took off in late December, but also peaked in late March.

That topping out in late March and early April does fit with the realization that US rate cuts had been, at best, substantially delayed.


Spinning, not climbing


That feels like rotation not recovery. The merry-go-round has just ended up on our own doorstep of late. If you look elsewhere, in small caps, my bell weather of doom, the Amati AIM VCT has been relentlessly down since late 2021, but has very slight recent uptick, and is trading on quite a slim discount now.

My other small cap telltale is Herald IT, very much taking off in late October and still making new highs, with (for this stock) a narrowing discount. Albeit it has a much less restricted remit and some of its small companies turn out to be quite big.

On a one-year basis, the US, Japan, India, Brazil all top a healthy 20% return, but on a three-month basis, only the Hang Seng (amazingly) hits double figures, a good chunk of which was last week, and Brazil is negative.

So no, not a classic recovery led by small caps and emerging markets, something more obscure.

From this pdf report.

But will it be another fake, like that immense pre-Christmas rally? Well fundamentals would still say yes, which is why I find it irksome.


Rate cuts – how many, how soon?


To me rate cuts look nothing like as baked in or as fast as in December; there really is no economic crisis, no recession. Growth keeps on, surprisingly strong despite so called high interest rates.

A rapid staccato set of cuts just won’t happen, it will be a gentle decline driven as much by politics as economics, and absent a crack in the labour markets (also not visible) not really going that low.

In particular, rates would then be neither low enough to give value stocks the boost of having their yields go way above gilts or treasuries, nor will they allow them to refinance absurdly cheap debt, at the same old give away rates. Both of which felt very much part of the pre-Christmas rally.

Until some sign of fiscal tightening (post elections) appears, we do expect the economy to run hot, and we do want central banks to have leeway to cut rates. And we want savings rewarded, modest but controlled inflation, sensible capital allocation, so what’s not to like?

Yet we have the risk off, value heavy rally from Christmas reprised, in what looks like a very different world, triggered it seems by Powell promising not to raise rates (as if he ever would).

So, we have a classic unloved rally, with summer doldrums and unpredictable US elections coming, to add to my unease.

The longer term, as I said, still looks fine, but we have to get there first.


What do UK local elections conceal?


Labour looks like a dead cert still, but it will be oddly unloved. Although in electoral terms (given first past the post in the UK) having four or five 10% opponents is a delight (Greens, Pro Palestine (if different), Lib Dems, Reform and that mysterious Independent group, mainly but not entirely unbadged Tories).

The total seat score and an absolute majority remains certain, but it does give some scope for odd three-way fights and surprises.

Then, there is the work of the Electoral Commission, creating weird new electoral patchworks out of their ruthless numerical hegemony. It is not clear how that shakes out.

It does also add an element of jeopardy, should one alternative faction catch fire. It will also leave a complex, disputatious opposition adding sand to the fuel lines, as the next Government tries to achieve something.

This also looks like a local councilor low (or high) water mark, solid Tory areas seem to have stayed resilient, and in the vast bulk of the middle ground, where the national majority rules don’t apply, ‘no overall control’ has done exceptionally well of late.

So, I quite like this market, nice to see some prices get off the floor and move past my “always buy” category, nice to see years of adding into falling prices finally reverse, but it is not (if it ever was) entirely logical.

The economic outlook is different from last year, and this rally should therefore be different.

That in many ways it is not, feels odd.