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Global Update Piece – Written 15 May 2020

Stock market history is packed with drama: the 1929 crash; Black Monday in 1987, when share prices lost 20% in a day; the dotcom mania in 1999. With such precedents, nothing should come as a surprise, but the past eight weeks have been remarkable, nonetheless. A gut-wrenching sell-off in shares has been followed by a delirious rally in America. Between February 19th and March 23rd, the S&P 500 index lost a third of its value. With barely a pause it has since rocketed, recovering more than half its loss. A one month bear market followed by a short rebound scarcely seems enough time to absorb all the possible bad news from the pandemic and the huge uncertainty it has created, especially when you actually consider the harsh reality of the economic data that is being released by the day.

There is a wide disconnect between the unprecedented economic pain felt by many and the seemingly broad optimism of the markets. To add some substance, the Federal Reserve released a survey yesterday that stated that 40% of households in the US that made less than $40k a year that had a job in February, lost it in March; unemployment has risen from 4% to 16% in the US, the highest rate since records began in 1948; the UK economy shrank by 2% in the first three months of this year (biggest contraction since 2008), despite only being impacted by the virus for a matter of days, economists expect an even bigger slump in the current quarter (potentially double digits). This would imply that there is actually little market euphoria, just a desperate reach for a handful of businesses that people are hoping will be all weather survivors.

It is also entirely possible that there will be a second wave of infections – we are sure we are not alone in observing the significant increase in the UK of people dropping their guard and flouting social distancing rules. Outside of the US, the third highest day of new infections was reported yesterday with 67,777 cases, with the virus seemingly reigniting in many supply chain areas in Asia. Governments are desperate to restart their economies because of the severe economic ramifications of not doing so, a second wave would surely be a killer blow for many companies of whom the government will have no option but to stop supporting. Even if we were to avoid this second wave, many bosses will be looking to ruthless cost cutting to protect their margins and pay down debts accumulated during this period.

Right now, we do not believe that the potential rewards of being invested come anywhere near to matching, let alone exceeding the level risk that is currently being presented by the markets. Only when this begins to change will we be comfortable re-balancing client’s portfolios to a ‘normal’ asset allocation basis. This being said, we are scouring the market for opportunities that do offer this risk and reward parity.

Written by Greenfields Financial Management Ltd.

This article is for information only and should not be treated as advice. No action should be taken in respect of this article without independent financial advice. This information represents the opinion of Greenfields Financial Management Ltd. only.

 

General References

  1. In Particular paragraph 1 – The economist ‘The Market vs the Real Economy’ – Found here: https://www.economist.com/leaders/2020/05/07/the-market-v-the-real-economy