Global stock markets have performed a remarkable recovery following the panic sales in March. After losing 35% from the peak, there is now only 10% missing to reach a new top. The market correction mentioned in our last update turned out to be short lived. Isn’t this the worst crisis the world economy has seen for many decades?
What is behind it
The deepest recession since the Great Depression looks increasingly likely to be the shortest, as well. US employers unexpectedly added 2.5mln jobs in May, easing worries over the damage inflicted by covid-19 and reviving hopes that the US economy may bounce back faster than feared. Whilst globally many companies had previously warned investors that a recovery of sales figures would be slow, there are now some surprisingly positive signals. And as Opec and Russia are extending supply cuts, the crude oil price seems on its way up after the massive crash in April.
But economic statistics don’t explain the current market dynamics. Yes, the market is looking beyond the current downturn and is pricing in the development post covid-19. But economic forecasts for the rest of this year still make a dreadful read. US unemployment claims declined in May but are still above 21mln (vs a peak of 6.4mln in the aftermath of the financial crisis!). And a full recovery is going to take a long time. First Trust “don’t anticipate reaching a new peak for real GDP until the end of 2021; we don’t anticipate a 4% unemployment rate until 2024”.
Liquidity has become the key driver for the market recovery. Central banks are pumping hundreds of $bln into the markets in order to limit the covid-19 consequences. Many professional investors didn’t trust the recovery and have kept huge liquidity. The pressure for them to increase their equity holdings is building up as the markets continue to rise. The upswing started to feed itself.
What it will mean
Since we wrote to you last time, the risks have not changed that much. We may still face a second wave of covid-19 infections. We can still not be certain to have an effective vaccine over the next 12 months (although there are some encouraging signs). The US-China trade tensions don’t seem to relax. The ECB stimulus still has to materialise and may turn out to be too-little-too-late for bridging the increasing north-south divide in Europe. We don’t see encouraging signals from ongoing Brexit talks. And we expect government budgets around the world to show astronomical deficits for years to come.
In a nutshell, there is little reason for euphoria. But it is right for markets to recognize that the world is not coming to a standstill. Unprecedented levels of fiscal and monetary help will provide a buffer against the worst effects of the crisis. And the financial system appears stable.
What to expect – and what to do
We wouldn’t be surprised by continued elevated volatility. And we would expect some more bad news to come. Not all the effects of covid-19 on businesses‘ value chains are visible yet. And average analyst forecasts imply that 2021 profits will be back at record 2019 levels. We think that looks optimistic.
But it should not be forgotten that during the March crash the markets were “undershooting”. IWG made good use of the resulting opportunities for our clients, and our recent investments show handsome profits – the stocks we picked even more so than the equity funds. But there are still plenty of opportunities out there. We believe that carefully selected stocks will continue to outperform broad market indices.
Your financial advisor and IWG are here to help you make the best of the emerging opportunities in a safe and controlled way.
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