ClockWise: Bear market rally or a sustained recovery?

Equity markets have recovered a long way since President Trump announced a 90-day pause in reciprocal tariffs. The recovery has been building steam, with the S&P 500 index last week ending a record nine consecutive sessions of positive returns for the first time in 20 years; the FTSE 100 index has seen its longest streak of gains (16 days) since its inception in the 1980s (Chart 1).

Chart 1: Consecutive daily gains for S&P 500 and FTSE 100 indices

Source: Bloomberg, RLAM as at 7 May 2025.

it is worthwhile to note that global equity indices are now trading at higher levels than before the large-scale tariffs were announced

Positive developments on trade policy, coupled with better-than-feared company earnings reports, have helped lift investor sentiment from deeply depressed levels over recent weeks. Our composite sentiment indicator had fallen to the third most depressed weekly closing level in history following the ‘US Liberation Day’ last month, and even as markets have recovered now, our indicator still remains at depressed levels consistent with a buy signal (Chart 2). While a sustained recovery in investor sentiment could continue to drive equities higher from here (company directors are buying their own shares while retail investors remain bearish for now), it is worthwhile to note that global equity indices are now trading at higher levels than before the large-scale tariffs were announced on 2 April. As flagged by our Senior Economist Melanie Baker, while the direct impacts of tariffs look better than initially seemed, we are still left with a 10% universal tariff, substantial rates on aluminum, steel and autos, extremely high tariffs on China, and additional tariffs on Canada and Mexico – the two largest trading partners of the US. All this is likely to be a considerable drag on global growth.

Chart 2: RLAM Composite Sentiment Indicator

Source: LSEG Datastream, RLAM as at 2 May 2025. The RLAM proprietary Composite Sentiment Indicator takes into account measures related to stock market volatility, private investor sentiment and company director buying. A reading of zero reflects average/neutral sentiment.

While risk assets have traded positively over recent sessions, it is not certain that we are out of the woods yet. It is worth remembering that the sharpest rallies have historically happened during bear markets. Our Investment Clock model has now moved into Stagflation, a time in the cycle where slowing growth and rising inflation can lead to poor returns for both stocks and bonds (Chart 3). On the growth side, GDP forecasts remain pessimistic, and business confidence has been beaten up by policy uncertainty. At the same time, inflation expectations have risen despite lower oil prices.

Chart 3: Investment Clock moves into Stagflation

Source: RLAM as at 7 May 2025. Showing historical trail with the yellow dot representing current readings.

We continue to hold a broadly neutral view on risk assets in this backdrop, monitoring the situation closely and ready to react if an opportunity arises on either side. We prefer more defensive parts of the market in equity regions and sectors, and remain nervous on US stocks and the dollar. Diversifiers such as gold can continue to shine in multi asset portfolios in the current environment. 

For professional investors only.  This material is not suitable for a retail audience. Capital at risk. This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.