Markets are in ‘bull’ mode but investors must avoid the traps set by this phony optimism

The British stock market has returned to “bull” territory as money flows back into shares but investors must not get too euphoric over the technicality.

A stock market is in bull mode when it rises 20pc from its lowest recent value, known as a trough. The FTSE 100, an index of Britain’s largest stocks, is now 20.4pc higher than March 23 when the market closed at 4,994. 

But don’t grab it by the horns just yet. That recent trough was the lowest the London stock market had been since September 2009 – so a 20pc rise, even in as short a time as a month, does not mean everything is okay. Yes, any rise is good, but the FTSE 100 remains 23pc lower than its record high in May 2018 and 22pc lower than its level in mid-January of this year.

And this is before we get into the fact that British stock investors make most of their money from dividends, which are being cut at an extraordinary rate.

It’s worth looking at the fundamentals behind market movements. The influx of money seems almost entirely due to the idea that lockdown restrictions will begin to ease. This will be game-changing for businesses on the brink. The sooner the economy is back to functioning, the more lost revenue will be clawed back and the more businesses will survive.

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