As the end of April looms, stock markets globally are a good deal calmer than they were in mid-March. Indeed, the US market, so often still the market from which others take their lead, has risen by nearly 30% from it’s very recent low albeit still 15% below its high. Interesting to reflect that Wuhan went into lockdown on 23rd January and the US market peaked nearly a month later on 19th February. Perhaps that confirms how little was understood about the threat of a global pandemic and how democratic governments would do the unthinkable and follow suit.
It also confirms that markets participants are, perhaps by nature, optimistic. The youngster’s acronym ‘FOMO’ (fear of missing out) tends to dominate more often than fear itself. We saw the latter very recently of course as panic gripped stock markets. Of course, it takes a catalyst to re-establish the optimism and, as we have previously noted, look no further than Central Banks, assisted by Governments, providing eye-watering levels of liquidity and targeted support for businesses and individuals alike. When ‘FOMO’ trumps fear itself, it helps that the alternative of being sat in cash has no return.
So, are we optimistic? Cautiously, yes, but not without some reservations. No market slump, like the one we have just witnessed, has seen a recovery without setbacks along the way, so it seems unlikely that the fear of just a few weeks ago will not return in some shape or form, however briefly. The global economy proved easy to put into a deep recession – stop travel, close most businesses and keep people indoors. Pulling it out of recession as lockdowns are slowly eased, and whilst no vaccine or effective treatments exist for COVID 19, is more challenging.
Markets will also face the reality of a dramatic fall in profits, many dividend cuts, and some companies collapsing despite the support of governments. So, our optimism is tempered a little by uncertainty in the short term. The most likely outcome remains a recovery in global activity later in the year and into next, although not fully out of recession until there is clarity on a vaccine and/or effective treatment. In this regard we are encouraged by the harnessing of Artificial Intelligence (AI) to greatly speed up the research into existing drugs and therapies. But risks to that outcome remain; a second wave of infections would, no doubt, see lockdowns re-introduced and it will be a while before both people and companies go back to the ‘old normal’. So, we will continue to be cautiously, rather than fully, optimistic when steering client’s portfolios through the choppy waters.
We are constantly aware that the virus is affecting the lives and livelihoods of friends, family, clients and, indeed, everyone. That, in itself, will slow the economic recovery. Our job is to look at things through the narrow prism of the investment universe and position portfolios accordingly. But there will be adjustments in daily life, some of which may be lasting and again judging the impact of this feeds into our thought processes.
Please continue to stay safe
The Investment Team