Reasons to be cheerful!
It might seem a bit of a paradox to some that investment markets have largely recovered since the unprecedented falls caused by the arrival of the coronavirus pandemic, in the face of a constant flow of negative news e.g. contracting economies, predictions of mass unemployment.
A big question, why is the market appearing to be so disconnected?
Perhaps the main reason is that financial markets don’t reflect everyday life. Rather they reflect the future expectations of everyday life.
While that view may change, dependent on how successful we are in combating the pandemic, there are a few factors which give us at least some cause for optimism.
Why be optimistic?
- Lockdowns continue to ease, by and large, across the world. This means increasing numbers of businesses are open again and more and more people are back at work.
- Thanks perhaps to growing knowledge of how to fight COVID-19 and treat the virus, fatality rates have been falling in recent months, compared with levels seen earlier in the crisis. This knowledge could help the economy if it encourages people to venture back outdoors, spend money and enjoy themselves.
- Reports on progress towards the development of a dependable vaccine for COVID-19 remain largely positive. Many different trials are underway, backed by leading pharmaceutical firms and armed with considerable resources. It goes without saying that this would be a major shot in the arm – no pun intended..! – towards getting the global economy on the path towards a full recovery.
- Central banks around the world have undertaken action on a massive scale to try and support economies through the crisis. Interest rates have been slashed to negligible levels – encouraging investment and supporting consumer spending – while enormous additional amounts of quantitative easing (“money printing”) have also been authorised in order to keep rates low and support business’s access to capital.
- Many governments have backed up this monetary policy from the banks with considerable fiscal support too. New spending in many countries is driving everything from infrastructure development to new car sales through scrappage schemes. Some countries, like the US, have even made direct cash payments to citizens to support demand.
- Not every firm has found recent events a challenge – many companies and industries have, in fact, been able to turn recent circumstances to their advantage. These include technology firms, healthcare and pharmaceutical companies, video game developers, supermarkets and online retailers.
- Those who’ve retained their jobs through the crisis are, in many cases, in a better financial position than before. This is because they have retained cash that they otherwise would have spent on travel, event attendance, meals out and so on through lockdown. This greater ‘balance sheet resilience’ could help support consumer spending from this point or mean that people are better-prepared to avoid financial difficulties in the future.
- Overall market returns have been very strong since the coronavirus-induced trough back in March. But with a significant division between ‘winners’ and ‘losers’ With the winners having made strong gains, while the losers have continued to lag- behind.
- For example, in the US, even after the rapid rally in the broad market, the share prices of more than a fifth of S&P 500 companies remain more than 50% below their respective all-time highs. The average stock in the index remains more than a quarter below peak. This is all, of course, despite the S&P 500 overall recently reaching an all-time high.
What does this mean?
The upshot of all this is that a few key ‘big winners’ have pulled the overall market up, but the share prices of many firms remain at relatively depressed levels. This means that there could be scope for many companies to make further ground from here, especially if the overall economic situation turns out to be less challenging than feared or a reliable vaccine for COVID-19 is soon developed and produced.
The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested.