Some red returned to stock market screens this week albeit there’s a small gain since the start of the month and the market has risen almost 25% since the it’s low point in March. It’s been one of the fastest periods of stock market growth in history and some continued volatility feels entirely consistent with the recovery to date.
This leads to a question which was raised again in conversation earlier this week: how cautious is my optimism? To answer this, we need to consider why have markets recovered so quickly and if there be another correction? So, here goes…..
I believe there are various reasons why markets have recovered so fast. Firstly, both mortality and infection rates are trending down. What was once forecast to overwhelm health services, and prompted the building of emergency hospitals, is not getting worse. It’s actually improving and markets have responded well to this.
UK government financial support has also been extended and at the same time, the basis of withdrawal has been set out. This support has been effective in getting money into the economy. When planned financial support was announced I suggested that free money would be far more effective than loans. Free money is more readily spent which puts it straight into the economy. Some governments have targeted handouts to individuals and families, which again, has been an effective way of injecting money straight into the economy.
In comparison consider the GFC (global financial crisis) when the financial support offered was on loan rather than free and remained largely in the banking and corporate sector. It didn’t quite reach the real, and very needy, economy. This time, support has been targeted more effectively. Financial markets have responded well to both the support and the positive message of a planned withdrawal as the country returns to work.
The media reminded me yet again this morning how gloomy April’s economic data was. Well of course it’s bad…it reflects the reality of a tightly locked down economy for the whole month. The May data is much better; still not great but it’s a big improvement on April and reflects our transitioning out of lockdown. Markets seem to have accepted April as the low point and the start of recovery.
The subtle change to government narrative has also helped. The tone suggests the social and economic benefits of easing lockdown now outweigh the health risk. This suggests the health crisis has been avoided and attention is now turning to the economy and specifically how to aid recovery. There is discussion about reducing social distancing from 2m to 1m. At 2m social distancing a restaurant will operate at 30% capacity, whereas at 1m, this increases to 70%. This change could ensure continuity of this sector of our economy.
In the last webinar on 3rd April and the update of 22nd May, the different shapes of recovery were considered along with the conditions under which each might play out. We looked at the sharp V recovery as the much hoped for bounce, the slower more likely U-shaped recovery and the prolonged recession of an L. This leads to the question of a second correction and the conditions around which this could happen.
The 25% rise in the UK stock market since the March low, can only really be described as the V shaped bounce. It’s been remarkable, and this is where the caution creeps in. To continue, we’d arguably need to see a vaccine or treatment to really build the public confidence needed to return to a fully functioning, working, travelling, socialising, spending society. While the vaccine race may have been stepped up, it feels as though we are some way from rolling out a vaccine on the scale needed for the speed of recent recovery to be sustained
There’s also the likelihood of increased unemployment and company insolvencies when we are weaned off Furlough. On a related note, US unemployment data last week was just 2/3rd of that expected, which was welcome news for financial markets. Despite this, when the Fed’ met earlier this week, a negative economic outlook was reported which wobbled markets. This emphasises how sensitive markets are to news flow.
In conclusion, it seems that a gradual return of around two thirds of the world economy returning to work by the end of 2021 remains a reasonable forecast. It’s equally reasonable to caution of some bumps along the way but on balance I’m positive in my outlook. The government have a key role to play and I look forward to Peter Duncan sharing his insightful thoughts on this when he joins our webinar next Friday. You’ll receive an invitation early next week and I welcome any questions you may have in advance. In the meantime, best wishes for the weekend.
Regards
Kenny