Are we now well into the stock market recovery?
What’s been surprising about the impact of Coronavirus on stock markets is the speed of the fall and now also the speed of the rise.
Most stock markets around the world have had a good month but there could be one more scary phase to go through before we are back to ‘normal’.
State of play – the main world stock market indexes
| Region | Index | Last Month Performance | Last 12 Months Performance |
| UK | FTSE All Share | 4.42% | -22.33% |
| US | S&P 500 | 16.59% | -3.06% |
| Europe | FTSE Europe ex UK | 3.36% | -16.42% |
| Japan | FTSE Japan | 0.11% | -13.03% |
| Asia | FTSE Asia Pacific ex Japan | 6.98% | -15.98% |
Data sourced from investing.com and up to 24/04/2020.
What’s been going on?
The number of new cases of Covid-19 around the world now seems to have reached the peak and are declining. There is also a decline in the number of daily deaths.
This is clearly good news but remember this is really only phase one of tackling the virus. Most countries around the world have implemented strict lockdown measures. The challenge now is how to lift these measures without causing a second wave of the virus.
Countries in Asia seem to be ahead of the west when it comes to controlling the virus and lifting lockdown.
The Asian countries certainly seem to have been better prepared to take on a pandemic with recent experiences of Swine Flu and SARs, meaning they have learnt best practice.
It’s difficult to know at this stage just how bad the long-term impact on the global economy will be. What type of businesses will survive? What changes will be made to those businesses that do survive?
The Institute for Employment Studies estimate that in the UK between 1.5 to 2 million people have already lost their job since the crises began.
In the US 26 million (15% of the workforce) have applied for unemployment benefits.
Pretty grim reading but markets have been spurred on by the huge packages of financial support from governments and central banks. This support has been designed to ‘hibernate’ the economy in the hope that things can get back to normal quite quickly once we are allowed to go about our normal lives again.
For those concerned about the level of borrowing being talked about, now is a better time to do it than any. Borrowing rates for the UK in particular are at record lows and demand to invest in government debt is high.
If things do get back to normal quite quickly there is the potential for higher inflation than we have been used to. More money in the system and high demand for goods and services (as we’ve been cooped up and desperate to spend) could mean prices rising faster than wages.
It’s unclear whether this will happen in the short term as lockdown restrictions will likely be lifted gradually giving businesses time to get their supply lines in order. Also commodity prices like oil are at record lows.
But longer-term governments will probably want to see some sort of inflation to help eat away at all this new borrowing. If they don’t get it through demand, they will get it by keeping interest rates low. So still no joy for cash savers.
Speaking of oil there has been a big battle over recent months between the big oil producing nations. As demand for oil has dropped, most of the oil producing nations agreed to lower output to help protect prices. Russia disagreed and saw this as an opportunity to hurt shale oil producers in the US. US Shale oil companies need the oil price to be above a certain level to keep them profitable.
This caused Saudi Arabia to retaliate and flood the market with oil, sending prices crashing. The two countries appear to have made up for now.
As stock markets rise it’s tempting to think we are now into recovery mode and it’s nice to see our pensions and investments go back up in value.
However a note of caution. Looking back through history the data tells us that bear markets (where a stock market falls 20% from its peak) usually come in three phases.
#1 – The panic and the sell off.
#2 – A short recovery bounce.
#3 – A more gradual decline as more as economic information and company fundamentals becomes more clear.
We don’t yet know if we are in phase 2 or whether we have passed this and are in full recovery mode.
What is important is to be on top of your investments and know the risk/strategy you are taking.
Our recently launched RTS Investment Strategy works on the basis that successful investing is 90% by asset allocation and 10% stock picking.
Our investors receive quarterly reviews, including market updates, performance data and recommendations for tweaking asset allocations/funds based on what the evidence and data tells us.
If you would like to find out more about the RTS Investment Strategy and/or to compare performance with your own portfolio then get in touch.
Risk warning:
Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.
