Why has the stock market rally stalled?

The UK’s stock markets have been subdued in May. The FTSE All-Share index has risen by the lowest pace in three months, just 1.3%. The index levels are still elevated. These levels were last seen in February 2o20, which was just before the market meltdown started. But the stock market rally has slowed down. 

FTSE 250 index gets sluggish

What I find most glaring here is that the FTSE 250 index’s increase has slowed down to o.5% from the month before. This is the slowest growth rate in the FTSE 250 since the stock market rally began in November last year. It is also the first time it has grown by less than 1% since.

This is also far less than for FTSE 100 index, which has grown by 1.6% since the start of the rally.  This is comparatively decent growth and has likely pulled up performance of the All-Share index too.

What explains this?

The FTSE 100 index includes many large multinationals. The FTSE 250 index, on the other hand, includes more UK-centric companies as its constituents. So, if the UK is in an uncertain situation, it is likely to show up in the performance of the FTSE 250 index as well. In that sense, the latest numbers are a red flag.

The UK is indeed facing fresh coronavirus challenges. While vaccines are playing their part in controlling the pandemic, variants still need to be managed. European countries like France have just put fresh travel bans on the UK to stem the spread of the Indian variant the country is currently grappling with. Yesterday, Prime Minister Boris Johnson said that we may need to wait before the final phase of the lockdown can end. The current plan is to lift it by 21 June.

Risks to the economy are also rising, as inflation picks up. The UK reported a jump in April to 1.5%, as commodity prices, including energy, continue to gain pace. Since commodity prices are a global phenomenon, there is now a risk to recovery across economies if prices start rising fast. 

What can happen next?

While these risks can be grave, I think there is a good chance that the UK can overcome them. When it comes to variants, the vaccines can now help in controlling both the spread and the severity of Covid-19. 

On inflation, I am encouraged by the fact that the central banks of both the UK and US have so far refrained from any interest rate actions. They are in a wait-and-watch mode instead. In the meantime, the planned public spending and the easing in lockdowns will support growth recovery. 

Can the stock market rally resume?

I am optimistic about the prospects for the UK’s stock markets, and that includes both the FTSE 100 and FTSE 250 indexes. With this in mind, I think the stock market rally could resume.