Quarter two was widely touted to be a month of volatility and corrections following corporate earnings announcements. However, somewhat surprisingly, two-thirds of US companies reported better than expected results, with the technology & health sectors leading the way. As a result, the VIX volatility index continued to drop finishing May 20% lower. This stability carried over to the developed markets with the S&P500 sailing through 3000 points now sitting 11% down from its February peak. The FTSE & Euro Stoxx continue to lag behind but still saw steady growth of 10% each for the month lying approximately 27% down on their all-time highs.
The policy response of the US, UK and other developed nations is both greater in magnitude and earlier in the recession than previous downturns. This decisive and aggressive action by the Fed combined with the US natural bias towards technology & healthcare stocks has paid off handsomely. The ability of the US to continue to manipulate the economy at will with its limitless fiscal and monetary policy should see the S&P continue to recover aggressively. The FTSE’s recovery has been somewhat hampered by its oil and banking stocks, however, with confidence returning, oil demand showing signs of picking up and the economy slowly reopening I’m expecting a good summer for US & UK equities.
This past week the European Commission announced its long-awaited €750 billion recovery fund; however, this still has to be passed by all EU members. This said, the news gave the Euro Stoxx a much needed 2.5% boost on the last trading day of the month – the EU still has significant obstacles to overcome managing the widening gap between the powerhouses in central Europe with the fragile south. For this reason, I do expect the Euro Stoxx to be slightly more sluggish in its recovery.
Since a biological crisis triggered the downturn and not a financial one, the timeline to recovery will be based on continued advancements in treatments, testing and vaccines that support the safe reopening of the global economy. Much will be learned over the coming months on how well companies and individuals can manage social distancing measures without triggering a new wave. Continued progress in limiting the spread of COVID will make the recovery more robust.