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The past few weeks have seen a deluge of poor economic data and yet equity markets continue to drift upwards. Since the recent low on the 23rd March, the US equity market has risen 21.02% to the end of last week, Friday 8th May:
This, fairly consistent, rise has led many investment strategists to question whether the market is too optimistic in the face of the economic damage caused by lockdown and social distancing measures around the world.
A good example would be the surge in US unemployment. According to the Bloomberg consensus estimate, the US unemployment rate rose to 16% in April. The true unemployment rate is probably higher since to be considered unemployed one must be looking for work, which is difficult if not impossible in the presence of widespread lockdowns. Regardless, even the official unemployment rate is the worst since the Great Depression:
So why have markets continued to rise? The key thing to remember is that equity markets are forward looking discounting mechanisms. This means that equity prices attempt to factor in the future impact of events on businesses. So, whilst the unemployment numbers in the US look frightening, they were marginally better than the market expected and, somewhat perversely, deemed to be good news.
The other area of focus over the past couple of weeks has been the gradual re-opening of economies. Each country is going about this at their own pace and in their own way, but markets are hopeful that economies can reopen with no second wave of the pandemic. However, the early part of this week saw some concerning news from Seoul, South Korea, where a cluster of around 100 new inflections have been linked back to a single 29-year-old man. In Germany, having eased their lockdown measures, the reinfections rate is now estimated to be back over 1, meaning that the virus could spread more quickly again.
In the US, Whitehouse staff now must wear facemasks after two aids tested positive for novel coronavirus. One of the lead members of Trump’s Coronavirus Taskforce, Dr Anthony Fauci is now self-isolating as a result. Dr Fauci is considered to be one of the world leading experts on infectious disease. In a video appearance before the Senate Health Committee, Dr. Fauci warned that a too-quick reopening at the state level could lead to “suffering and death that could be avoided”.
Broadly speaking, the spread of the virus now appears to be largely under control. The phased easing of lockdown, without triggering a second wave is extraordinarily difficult and the immediate outlook for financial markets remains opaque. During these times of extreme uncertainty, we would strongly encourage clients to rely on tried and tested investment techniques to mitigate risk. These are; ensuring that your portfolio is well diversified across a broad range of asset types from around the world and to avoid, at all costs, the temptation to try and “time” markets. Whilst doing nothing can feel extremely uncomfortable, experience suggests it is often best for your long-term investment returns.
Until next week, stay well.
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Past performance is not a guide to future performance and may not be repeated. Investment involves risk. The value of investments and the income from them may go down as well as up and investors may not get back any of the amount originally invested. Because of this, an investor is not certain to make a profit on an investment and may lose money. Exchange rate changes may cause the value of overseas investments to rise or fall.
This article was issued by Capital Professional Limited, trading as Ascot Lloyd, Ground Floor Reading Bridge House, George Street, Reading, England, RG1 8LS. Capital Professional Limited is registered in England and Wales (number 07584487) and is authorised and regulated by the Financial Conduct Authority (FRN: 578614). This communication is for information purposes only. Nothing in this communication constitutes financial, professional or investment advice or a personal recommendation. This communication should not be construed as a solicitation or an offer to buy or sell any securities or related financial instruments in any jurisdiction. No representation or warranty, either expressed or implied, is provided in relation to the accuracy, completeness or reliability of the information contained herein, nor is it intended to be a complete statement or summary of the securities, markets or developments referred to in the document. Any opinions expressed in this document are subject to change without notice and may differ or be contrary to opinions expressed by other business areas or companies within the same group as Ascot Lloyd as a result of using different assumptions and criteria.