As news reaches us today that the UK lockdown may have already begun to slow the spread of COVID-19, I wanted to get in touch to share our current views with you. Despite the market movements so far today, there have been a number of positive news stories released this week and I thought it would be beneficial to share some of these.
Markets finally received what they wanted from US lawmakers at the beginning of the week. The House of Representatives passed the $2trn package providing direct fiscal support to citizens and businesses impacted by the economic fallout from coronavirus. This was taken positively by markets though a lot of the good news was already in the price after the strong rally we saw last week. The theme of the last fortnight has been increasingly dramatic intervention by governments and central banks globally. Our expectation is that this will now take a pause for the short term and markets therefore will take their tone from two factors: estimates over the expected duration of the coronavirus lockdowns and economic data that hints at how much activity has stopped. That said, there are already rumours of a new US $600bn fiscal package being agreed between the White House and Democratic Congressmen and should this come to fruition it is likely to boost sentiment further. The bill is expected to include more state aid as well as specific assistance for the mortgage market and travel industries. This shows the political will to add to the current stimulus in order to cover gaps in previous policy or to address emerging risks in certain sectors of the economy – this reassurance may be more powerful than the stimulus itself.
We expect to see extensive weakness in economic data sets as they are released over the coming weeks. The US initial jobless claims showed how dramatically the brakes have been put on in some sectors of the economy. This is unlikely to be unique so expect many headlines announcing the ‘worst reading since data collection began’. The more positive aspect is that this is what the markets are expecting and a good deal of this is already in the price. The main question is how long this will continue. Expectations are for the brunt of the slowdown to occur in Q1 and Q2 of 2020 however should this extend market sentiment could turn negative again. This is why new case growth slowing, and any success in antibody testing, is so critical for near term optimism.
The major news from yesterday was the Chinese Purchase Manufacturing Index surveys, which point to a rebound in economic activity post the lifting of the lockdown in the country. The manufacturing and the services measures both moved above 50 implying an improvement in conditions. Clearly this needs to be taken with a slight pinch of salt as the global slowdown that is expected from coronavirus will undoubtedly impact both supply and demand in China. However, the latest figures will start to add weight to the argument that we will see a V shaped recovery in the Western world once the lockdowns are concluded, particularly if fiscal stimulus provides a significant boost to activity in the interim.
Given increased efforts to contain the spread of the coronavirus, we anticipate a sharp (but we hope short) contraction in the world’s biggest economy, the US economy, which has likely already entered into recession this month.
We expect, however, that this could also turn out to be among the shortest recessions in history. Importantly, we assume that the need to significantly restrain activity, such as the closure of non-essential businesses, will dissipate by late in the second quarter. Under such a scenario, and with aggressive fiscal and monetary policy measures, we would foresee a rebound in growth in the third quarter to mark the end of this sharp yet short recession.
Next Monday, 6 April, sees the start of the new 2020/21 tax year and this brings with it opportunities for investing fresh money into the markets, using available allowances such as ISA and pension contributions. Given that the price of most equities has become much lower than it had been, investing now means that equities have more room to grow before they reach what analysts assess as their fair value. Markets have rebounded somewhat from their lows on 23 March, however, are still down significantly from the start of the year, for example, the FTSE All Share index is still down over 26% since January, representing a potentially good time to invest. If you would like to discuss this in more detail, please do get in touch with me.
Please click on the below link to view a chart which I recently received from Vanguard, whose investment strategies we regularly recommend, entitled ‘Bull and Bear Markets’. This chart shows market cycles since 1900 and helps to demonstrate the value of staying the course. It shows that bear markets, which is where markets fall more than 20%, have historically always been short in duration and followed by a longer period of growth. While we have never experienced such restrictions to movement and a subsequent drop in demand, markets have experienced sudden shocks before as demonstrated in the graph, and we can draw on this experience.
The months ahead will be trying times for all of us, as consumers, investors and people contending with the virus. But we have faith that there are better days ahead and would urge you to continue to take a long-term investment view. Investing for the long term gives your money the greatest chance of growing in value. But this means holding your nerve during periods of significant stock market volatility – and remembering that, as history shows, markets will recover.
If you wish to speak to your financial adviser directly about any aspect of your portfolio, you will find their contact details on the About us page. We have accounts in place with Zoom and as such are able to carry out face-to-face discussions with you using this technology, in place of physical meetings. Our contingency arrangements across our offices are now in place, but please be assured we are working hard to deliver the best outcomes for you, keep you updated and guide you through this unsettling period.
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