As expected, markets continued to be volatile, the FTSE closing below 5000 for the first time since September 2009. However, not entirely unexpectedly, we saw the major markets recover by more than 10% by the end of the week including a pullback of 5% on Friday as markets tried to make sense of the turmoil and whether the bad news has been priced in.
These unprecedented times were met with unprecedented measures by Governments. Initiating the market recovery with pledges from the U.K. & U.S. governments to do ‘all it takes’ to ensure their respective economies can ride out this storm. The U.S. announced a long-awaited $2 trillion stimulus package after the UK Chancellor Rishi Sunak announced his own £330 Billion care package to assist businesses, employees and, finally the self-employed.
It’s anticipated this is just the start with total Government spending to be more than double already announced. Boris Johnson was recently praised by Nobel laureates and former central bankers for his ‘world class’ economic response, while the consensus is that Donald Trump’s dithering could result in a slower recovery in the U.S. The key will be whether the benefits systems can keep up with the unprecedented demand and how quickly countries can get back on their feet. For example, as of this morning, Wuhan’s lockdown has been lifted with people being allowed back in by train.
I’m reluctant to say the worst has passed. Indeed, in terms of contractions and deaths, I think the numbers will continue to climb, albeit at a slower pace with the current lockdowns – providing people can stick to them! There are however signs that things could be looking up, I’ve listed these below:-
- Up days outnumbered down days – The stock market rose in three of the five days last week, which was a small victory to be sure. This included the first back-to-back up days in more than a month and was the first week since February 14th in which daily wins outnumbered daily drops, including a 9.4% gain on Tuesday, the 9th-best day for the S&P 500 on record.
- Unprecedented times have been matched with unprecedented policy responses – As described above, Blueprints were unveiled last week on the policy bridge needed to span this chasm created by the social-distancing lockdown, to help get the economy safely to the other side of the virus impact in sufficient shape to foster a vigorous rebound.
- Bad data is no longer automatically driving bad reactions – As news around the coronavirus’ global spread increased, along with the accompanying negative economic impact, it was met with unmitigated declines in the equity markets. Performance in recent days is a positive signal, with stocks posting gains at the same time that economic readings have been increasingly negative. This would suggest the bad news and financial ramifications are mostly priced in.
- Small signs of health care progress – The brutal reality remains that the epidemiology of this situation is highly unpredictable. That said, I suspect that some component of last week’s market rally was driven by glimmers of progress on the medical front – as small and early as they may be. Testing capacity in the U.K. & U.S. is beginning to ramp up, and nationwide social-distancing practices – while exceptionally painful for the economy at the moment – are potentially shortening the timeframe to a peak in new cases
- When it comes to investment performance, there’s more than meets the eye – The bear-market sell-off (20% or more) in stocks has garnered plenty of attention, not only because it’s the first in more than a decade, but also for its velocity in getting there – falling from an all-time high to a bear market in just 15 days (the fastest ever). While the magnitude of the decline may also feel unsettling, the headlines don’t necessarily tell your personal story. Remember that diversification shows its mettle in times like this. A balanced, diversified portfolio of stocks and bonds, while not immune to market volatility, has travelled a smoother path. Notably, when the S&P 500 was down 30% for the year just a few days ago, a 50/50 diversified portfolio was off 18%.