Tipping Point? Tipping point is actually one of my wife’s favourite programmes and indeed we actually have a client who not only appeared on the programme – but won the jackpot as well! However, this blog is not about television, more about tipping points in markets and an update on where we are. April finished as one of the strongest months for gains in years, and May is continuing this upward trend. Whilst it is reassuring that the easing of the lockdown measures will assist the economy, it is far from clear what the longer term economic impact will be. Investor sentiment has reached a point where there is little room for manoeuvre or disappointment. Hence, are we at a tipping point? Tipping points are almost impossible to see in advance, but when they happen, things move fast and markets fall. So whilst the reopening of the economy (however slowly) is positive, the worsening relations between the USA and China is a negative. If we look at responses to previous market crashes – 2008 Lehman Brothers Collapse, Black Monday October 1987, 2000 – 03 recession and the ending of the Dot Com boom. What we see is that this bounce is different! Quicker and more direct than previous. The downward trend has now been corrected, with most major market indices back above their 50 day moving average. This is a technical indicator that has a long history of showing when a recovery after a sharp downturn has gained force and momentum. It is of course possible that markets are wrong, but the technical factors do point, and show, that global investors are positioned where we would expect them to be, if there was a broad confidence in the way ahead. In the absence of significant real world developments, such as a second wave of Covid-19 infections, there is now genuine momentum pushing the market higher. So the tipping point in confidence has been reached, but only the developments in easing of lockdown restrictions and infection rates, will show if that confidence is justified.
Congratulations! Well done all of you! As of today – Tuesday 19th May 2020, it is exactly one quarter since February 19th, the data when stock markets peaked and began their phenomenal slide downwards in the face of the confirmed spread of Covid-19 globally. So, well done, you have made it through, so let’s look where we are now. Yesterday, markets went ballistic, with our own FTSE100 Index up 4.28% as we played catch up on World Markets, (about time too!). This was on news of the promising early stage test result for a potential Covid-19 vaccine. So the light continues to shine at the end of the tunnel. The ‘Covid Crash’ is emphatically not part of the normal cyclical economic process. It’s what we call a ‘Black Swan Event’ i.e. something that is not supposed to happen – but does. So is it right to be positive? The simple answer is yes. Low interest rates focuses attention on dividend returns from equities; and even though 42 companies in the FTSE 100 have cut, passed completely or suspended their dividends so far this quarter, the yield remaining on the FTSE100 at 4.5% is comfortably above your average deposit account at 0.1% per annum. The second point of positivity is the continuing support from Central Banks – witness the about to be agreed 500 Billion Euro bailout plan from the European Central Bank. This is the quarter when the baby goes out with the bath water, and companies are busy dumping any and all bad news they can find, so that Q3 and Q4, will look much better. The new normal for economic activity for the next 2-3 years will be approx. 90% of previous, and that is positive compared to where we have been. We don’t know what we don’t know, but the one thing we do know is that the light is getting brighter. Stay Safe. Survival Tip. I am just re-reading Wolf Hall by Hilary Mantel; well worth the effort for history nerds such as myself.
Roots of Recovery? We have this morning started to receive the economic numbers for the damage COVID19 and the lockdown has caused. The UK economy shrank at the fastest monthly pace on record during March when UK GDP fell by 5.8% compared with the previous month. This is the largest monthly drop since records began in 1997 for the monthly reporting. In the first quarter of 2020 UK GDP fell by 2% compared with the previous quarter, the largest drop since 2008 and the Financial Crisis. It’s not all bad news however, the 2% fall for the UK economy was smaller than the decline of 3.8% for the Eurozone over Q1, but this is largely accounted for by the later start for the UK into lockdown. Extrapolated out, and using the Bank of England forecast the adjusted fall in GDP for Q1 will be 3%, with a possible 25% fall in Q2. This would mean a possible 30% drop for the first half of 2020, giving us the fastest and deepest recession for over 300 years. However, we still believe in our base case previously put forward of a U shaped recovery, defined by the gradual relaxation of the lockdown measures we are currently under. We expect a severe global impact on employment particularly in the USA, and this would cause systemic risks to economies. We rate this scenario as 60% Probability – possibly erring into our more positive outcome of a V shaped recovery, which is possible – see below Today’s Survival Tip The use of the Words ‘Common Sense’ returns so take a walk – now that you can!!
We would like to thank our wonderful clients for all the questions that have been sent in. We could only answer a small amount, however we will get back to those individuals with unanswered questions. We would welcome any feedback on the video, we would also like to know if you would like us to create more, including live Q&A sessions. Please click here to view the video.
April has finally ended – Phew!! As we stand, we now know we have generally passed the pandemic peak globally, but the economic numbers from the effect of the first quarter of 2020 will continue to bring genuinely shocking numbers on economic performance for months to come. Undoubtedly this will be the worse year for the global economy since the Great Depression of 1930-33, and all economies will enter recession to various degrees. So how long will the recession be, and how long will the economy take to recover? In the USA the average length of Downturn is 18 months before economies show recovery from recession, and in the UK, the average is 24 months, and again on average economies globally take 11 quarters to get back to previous peaks from the very bottom of recession. However, this time around, Central Banks and Governments have utilised some very heavy fuel to stimulate and maintain economies, unlike other recessions, with the exception of the Financial Crisis of 2008. So we think this time, the time span to recovery will be shorter, notwithstanding a second wave of the pandemic. Whilst public debt as a percentage of GDP across the globe has mushroomed, this is not a problem for Global Government who can monetize debt at any point. High debt for corporate and individuals however, is a real problem as this inhibits growth and consumer spending. High consumer debit is not an issue in this recession, and so will assist recovery time, as consumers rediscover the art of spending. Despite all of the above, markets, especially in the USA, finished the quarter up from their lows, because markets are looking forward to recovery longer term and not shorter term recession. Q2 will be rocky as these economic shock numbers are declared but this recession does not feel like others- and I have witnessed many – because of the stimulus being applied. Yes there will be further casualties and bad days, but our view is a shorter recession than average, but the long climb back to previous peaks of markets may take a little longer. Survival Tip This weekend go back in to Board Games, but dump Monopoly – too long and boring – and instead play Risk! Far more all-consuming game, and a tip for victory, don’t try and take over Asia and expect to win. Does that sound familiar Mr President?!
What a strange World we live in at the moment, particularly in global stockmarkets. Markets in the USA are up more than 10% in April, and are on course to surpass October 2011 as the best month in markets in America for over 30 years. European and Asian markets are up a ‘mere’ 6% by contrast. All this despite Americas position now as the global epicentre of Covid-19. So why is this happening? Two words – Federal Reserve. The Fed not only acted quickly in cutting interest rates, but they launched a new round of fiscal stimulus and quantative easing at levels that blew everyone else away. Our only questions here is, ‘is this sustainable’? well probably not, but it does explain Trumps eagerness to open American businesses quicker than other countries. The second quarter earnings season reporting continues apace, and economic data out today will show the US first quarter GDP will decline for the first time in 6 years, but the real damage to global GDP is happening now, in the second quarter, and these numbers will not be reported for another 2 months. In Europe the easing from lockdown restrictions is scheduled for various dates in May, so we will have to see how that goes. Social distancing and lockdown restrictions have undoubtably worked successfully, and across the globe it can now be seen that the peak of the virus was about a month ago, and as this has become clear, market volatility has eased, and investors have started to look forward again. Human biases exist in all of our lives, and there is a genuine fear that this market rally – which in America now entered “Bull” market territory – has been driven by people for whom the virus has been less immediate and close, known as recency bias. However, we know its bad news economically, but we still don’t know how bad, and we will not know until those second quarter numbers appear. So in my view the rally is a little over optimistic at the moment. Survival Tip Today, call someone you have not spoken to for over a month. I am sure they will appreciate it.
Times are hard at the moment, with many friends and family distancing. People are lonely and scared, however one of our lovely clients has created a short video reminding us of the important things in life. Words cleverly written in the exact style, time and rhythm of the original opening soliloquy from Shakespeare’s Richard III. We welcome any feedback to pass on to the creator. Stay Safe.
As we brace for another week of investment management in what seemingly are permanently volatile markets, what have we got to look forward to? The American S+P 500 Index hit its all-time high on February 19th 2020; then it tanked during the first phases of the pandemic, and since then has recovered more than 50% of its losses. So, is the rally ongoing? Well, the market is rarely “wrong” as it is the conglomerate of many opinions, and investors views on the future. The fundamentals of those opinion to the upside, point to the scale of assistance provided by The Federal Reserve, which dwarfs anything previously seen; and the aversion of a credit crisis in March. Both positive, along with other positive views of the aversion of an all-out medical crisis, and the pent up demand from consumers once the world re-opens. So, all reasonable arguments. To the opposite view is the fact that the earnings reporting season is underway, and is largely disappointing analysts, and effectively the World is still in a medically induced coma, and we have no way of knowing exactly how and when the coma will end, and what the final cost will be – if ever that is known. Whatever happens, the World’s economy will be running at less than 100% for some time to come, irrespective of when we all go back to work, and we will of course, as we have previously stated, endure a global recession along the way. We should all be pleased that social distancing and the lockdown, are working, and that the search for a vaccine is progressing at pace, and this will all help sentiment going forward. However, whilst the rally in global markets has been extremely welcome, there is little to progress markets much further for now; until we enter the next phases of return to work, opening entertainment venues, and opening schools. Only then will we be able to really view accurately the cost to businesses and the economy; and from that point we can then have a view on the positions of the markets in being either overvalued or undervalued at that time. Today’s Survival Tip:- read Wordsworth ‘Nuns Fret not at their Convents narrow Room’. It sort of tells you where we are today.
Good Morning All, we trust you enjoyed your holiday to the best you could in current circumstances; but markets are open again, so it’s time for an update. The combination of unprecedented policy support and a flattening viral curve across various countries, has dramatically reduced the downside risk generally for the global economy, and has lifted the S+P 500 Index out of Bear Market territory. At 2790 the S+P 500 Index stands 25% above its March low of 2237, leaving equities generally about 18% below the record all time Index highs of mid-February; and broadly values are where they were in June 2019. The first quarter earnings reporting season in 2020 for companies gets underway this week, and we will hear from businesses representing about 18% of the above index constituents, which by Friday will mean we will have a much better understanding of what actual damage was done to company profits during late February and March. These figures will not be absolutely conclusive, as the first quarter straddles a period when we had no virus and a period with a booming economy – to a period which closed down entire countries. So it could be a volatile week as the numbers are crunched and the guesstimates made, and we fully expect companies to do a ‘Baby and Bathwater’ strategy and put all the bad news into one quarter, to set themselves up for a better second half of the year. We shall as always, wait and see, and then advise accordingly. Keep Safe. P.S. Check out our webinar on Covid-19 and Financial Planning by clicking here.