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.