As shares surge, what next for this stock market rally?

The past five weeks have taken a toll on global investors. After hitting a record high on February 16, the FTSE 100 the index has taken a dive. Meanwhile, the U.S S&P 500 the index also points south. But after a shaky start on Friday morning, the stock market rally has brought relief to investors.

UK stocks and US stocks down

At an all-time high, the Footsie rose to 8,047.06 points on February 16. At 8.30am on Monday, it had fallen to 7,238.23 – a plunge of almost 810 points. That can result in a 10% loss in less than five weeks. Ouch.

On the other side of the Atlantic, the S&P 500 index reached its 2023 peak of 4,195.44 points on February 2. At the end of March, it fell to 3,808.86 on the 13th. That is a decrease of almost 390 points (-9.2%) in less than six weeks.

A new stock market rally?

Clearly, investors have been ‘buying the dip’, as the stock market has rebounded this week. As I write, the Footsie just closed on Tuesday at 7,536.22, up almost 300 points (+4.1%) in less than 48 hours.

In the US, the S&P 500 is currently hovering around 3,978.55, up nearly 170 points from its March 13 low. But the 4.5% gain in eight days is not as bullish as I am excited at the thought of a new bull market.

Will this roll continue?

As a math and physics geek, one of my heroes is Niels Bohr, Nobel laureate in Physics and founding father of quantum theory. One of Bohr’s often cited quotes is: “Predictions are very difficult, especially about the future”.

Since the future is completely unknown – and I don’t have a crystal ball or tarot cards – I can’t predict market movements. That said, it’s clear to me that stock prices are being pulled this way and that by FUD – fear, uncertainty and doubt.

Of course, investor sentiment is the key to what happens next. As one old town says: “The market rises to the wall of worry” – and investors are now worried. After this week’s relief rally, investors may not be surprised, but it’s too early to be complacent.

In short, I can’t say how the stock price will trend over the next few weeks. However, I believe they will remain volatile until this new banking crisis stabilizes.

The FTSE 100 looks cheap to me

In my view, US stocks don’t look too undervalued right now. The S&P 500 trades at a price-to-earnings (P/E) ratio of nearly 18, with a yield below 5.6%. What’s more, the low index dividend yield is only 1.7% a year.

On the other hand, the FTSE 100 trades at a P/E of 11.3 and yields 8.8%. Also, it offers a cash yield of around 4% per annum. Then again, I expect the American economy to be stronger than the UK in 2023-24, making this value comparison less clear.

In summary, I expect the stock price to ride this roller-coaster for some time. But experience has taught me that buying discounted stocks from panicked investors has been a successful strategy in the past. So if I had fresh cash, I would buy more of the stocks they are selling!