Coronavirus (COVID-19) Update – 12th June 2020
In the past fortnight the lifting of lockdowns has accelerated with a concomitant pick-up in economic activity, a welcome development for many but increasing the risks of a second wave of infections. Also, for the first time in months, headlines containing news of the virus have been superseded by the reports of, and reaction to, the shocking death of George Floyd in Minnesota at the hands of the police. Contrary to the social distancing rules, such has been the outpouring of grief and anger that thousands have gathered in numerous places across the world for anti-racism protests. In several American cities these protests have been marred by rioting and civil unrest.
Against this febrile and uncertain backdrop (and we must hope that with regard to the Black Lives Matter movement there is real and lasting change) the US stock market (as represented by the S&P 500) succeeded in regaining all the ground it lost when the Covid crisis hit and by 8th May was back in positive territory for the year (+0.67%). In dollar terms this represents a rise of 44.90% since the lows on 23rd March. Given the dollar’s strength versus sterling (or perhaps sterling’s weakness) this translates into a healthy year to date return of 5.03% to the peak on 8th May. Since then however, there has been a sharp correction with the index losing over 7% of its value (in dollar terms). As at yesterday’s close the return for the year is -6.49% (-2.01% in sterling terms) which many would argue still does not reflect the economic reality nor the risks that remain very much in place.
Here in the UK the picture is not quite as rosy with the FTSE All-Share down 18.70% so far this year. It has been stymied by the lack of technology exposure and its high weighting to energy and financials, sectors which dominate value indices. However, the resurgence of value versus growth which we mentioned in our last update had continued with the FTSE-All Share rising 8.53% from the 22nd May to 8th June, versus the more technology heavy S&P 500 return of 5.04%. Our preferred value-oriented UK fund, Man GLG Undervalued Assets advanced 18% during this period.
As can be seen in the chart above, equity markets have taken a tumble in the last few days although at the time of writing the FTSE All-Share is in positive territory so, as always, it’s impossible to tell if this is a blip or the start of something more worrying.
The foundations of the rally seemed to lie in the belief that with countries opening up again, their economies would be able to recover quite quickly when combined with the huge levels of central bank and government support that has kept businesses and individuals afloat. Lagging data such as quarterly GDP numbers will continue to be sharply negative for some time (indeed the UK’s Office for National Statistics today announced that GDP fell in April by 20.4%, the biggest monthly fall since records began in 1997), but it appears that investors have been able to look forward through this year’s earnings to next year and a resumption in growth. There was also a major boost last Friday with much stronger US employment data than had been expected. It showed that 2.5m jobs were added in May, confounding consensus expectations of a further 8m layoffs. In percentage terms this equates to an unemployment rate of 13.3% against a forecast of 19%. Sentiment was also bolstered by the announcement of a larger than expected €750bn recovery fund proposed by the European Commission with two thirds to be distributed as grants rather than loans.
However, the virus has, by no means, been successfully contained and life is still far from normal. Speaking to reporters on Wednesday following the US Federal Reserve’s latest decision to keep interest rates at record lows, Chairman, Jerome Powell painted a gloomy picture, forecasting that unemployment will be structurally higher for years to come. Expecting inflation to be below the 1% lower bound of their target for this year and unemployment not to return to pre-Covid levels until 2023 at the earliest, the Fed is committed to keeping interest rates low and will continue to buy up bonds to support the economy. On the one hand investors should be reassured that the Fed has no intention of removing the liquidity that has been fuelling the stock market since the Great Financial Crisis of 2008-9, but on the other, it also served as a stark reminder that it may take considerable time for economies to repair the damage that has been done in the past few months, not least because the infection rate in countries like India and Brazil is still rising and there are worrying signs that it is not yet under control in certain US states such as California and others such as Texas and Arizona, which chose to reopen relatively early.
Countries such as China and South Korea have demonstrated that steady progress can be made in restarting activity whilst remaining vigilant to signs of new outbreaks. Testing remains high and, so far, infection rates have stayed low. In Europe, Denmark and Austria appear to have implemented successful testing regimes for new infections. Elsewhere, there are risks that the required measures to exit lockdown measures successfully (including effective contact tracing) are not yet fully in place. Whilst some might argue that governments are unlikely to impose full lockdowns again it is perfectly plausible that should the number of deaths reaccelerate, and health care systems come under renewed pressure, then people will respond by limiting their economic activity without being told to.
On top of this we must also not forget Brexit and the upcoming US election (with a Democrat victory likely being viewed as negative for the markets). Michael Gove today announced that the UK would not be seeking an extension by the deadline of 30th June which is perhaps not surprising but does increase the risk of a no-deal departure.
So, all in all a rather mixed picture this week. At the outset of writing this note, markets were soaring but in the last two days investors have changed tack. Lagging economic data is as dreadful as we expected but there is some optimism on the ground as people return to work and shops reopen.
As ever, we remind our clients that investing is for the long term and that volatility is the rule, not the exception.
We hope that all our clients stay safe and well. Please do get in touch if there is anything you would like to discuss further.
12th June 2020
RiverPeak Wealth Limited