WeeklyWatch – A reality-check for swooning stock markets
07 April 2020
After the initial swooning of the stock market, the numbers began to rise as governments and central banks unloaded their fiscal and monetary arsenal, with the latter estimated to add up to several trillion dollars in aggregate. Over the last week, however, investors have experienced a reality check as key indicators that point to the depth of the economic damage already done by virus mitigation methods. According to Moody’s analysis, around 29% of the US economy has now fallen idle, and the global economy is in its sharpest slide since the Great Depression.
Perhaps the biggest realisation that investors have now come to is the sheer unpredictability of the virus’ trajectory – even for epidemiologists. It’s unsurprising that investing through this period is therefore somewhat up and down, as evidenced by the varied direction of the S&P 500 over its five-day trading period, which ended somewhat down. Both the FTSE 100 and EURO STOXX 50 finished slightly down too, while the VIX (which measures volatility on the S&P 500) ended the week only just below 50 points after retreating from its 80-plus high of mid-March. The index’s long-term average is 20.
Some investors, however, identified the nature of the problem earlier than others.
Speaking last week, Hamish Douglass of Magellan, manager of the St. James’s Place International Equity fund and co-manager of the Global Growth fund, said: “Modern market history provides no meaningful reference points for the current crisis – the scale of the potential economic damage is bigger than anything else we’ve seen. As a result, market behaviour, both during the crisis and in the recovery, could be very different too. Anyone who thinks that markets will react in the same way that they have in previous setbacks – the global financial crisis, for example – may well be mistaken. There is no effective playbook. The extent of the potential economic damage here is unique.”
New highs, new lows
The damage Hamish was speaking of is certainly becoming clearer and clearer, both in the markets and the global economy as virus infection numbers continue to rise. Last week, the first quarter of the year ended with the S&P 500 down 20%, the Nasdaq down around 14% and the Dow Jones down 23%. At the same time, the number of worldwide infections rose to over a million. From beginning in China to spreading through Europe, it’s now become a largely American tale with 40% of new cases emerging in the US.
With now more than 330,000 cases and nearly 10,000 deaths in the US, its projected that they’ll need around 80,000 more beds than they currently have to deal with new cases, as the daily rise in numbers continues to increase. Extreme measures have already been taken in some cases; a US navy ship provided a thousand extra beds by docking in a New York harbour. The US president also issued a warning last week of “three weeks like we’ve never seen before” as between 100,000 and 240,000 US virus deaths have been estimated.
Lockdown measures are doing more than simply emptying some of the world’s most famous public spaces too, with US jobless claims rising to 6.65 million in the week ending 28th March; the previous record weekly rise was 695,000. The FRED Economic Policy Uncertainty Index also struck a new high last week, and half a million US retail sector workers have taken furloughs. The numbers may look bleak, but it still remains possible for the rapid fall to be matched with a rapid recovery.
“Unlike the Global Financial Crisis, we do see a relatively rapid bounce back,” said Keith Wade, Chief Economist at Schroders. “After the downturn in 2008, it took just over three years for the US economy to regain the level of GDP achieved prior to the crisis; one of the slowest recoveries on record. Growth was held back by the unwinding of the debt bubble, which meant that banks and households were focused on reducing their borrowing. This time [we see] the US returning to its previous level of activity in the third quarter of this year. Such an outcome reflects expectations of the lifting of restrictions on movement and the return to work as business restarts, shops re-open and normal activity resumes.”
Even if it’s not the epicentre, Europe still has plenty of political and economic ramifications to deal with, too. Excepting Sweden and the UK, many European countries were showing signs of the virus spread slowing last week, while the possible political and economic costs also began to become clearer. A lift in stocks was seen in early trading this week after expectations of eased lockdowns across Europe, just hours after the same was seen from Asian stocks.
Economically, the scale of contraction has been breathtaking. Italy, Spain, France and Germany all reported March PMI readings for services and manufacturing as worse than since they began 20 years ago; broader eurozone indicators show similarly grim numbers. One particular lowlight came from Italy’s services PMI, falling from 52.1 in February to 17.4 in March (50 indicates no change).
Capital Economics now believes that UK unemployment will crest above 6%. “The confirmation that the economy stagnated in the fourth quarter of 2019 shows that it was very weak even before the spread of the coronavirus in the UK,” they said. “We expect a 15% quarter-on-quarter fall in GDP in the second quarter and things could easily be worse.”
From a political standpoint, leadership and unity in Europe both look fragile. The closure of borders in the EU highlights where power lies, while struggles over communal funding perhaps come as no surprise. Germany and the Netherlands both rejected the idea of a ‘corona bond’ when it was suggested by nine EU countries, and Brussels has now said it wants the power to tap international markets for €100 billion in loans to help stricken countries with unemployment reinsurance. The Eurogroup will meet virtually today to discuss a deal.
Meanwhile, in the UK, the government has faced increasing criticism over its relative slowness in imposing restrictions and providing protective equipment to the NHS, as well as their hesitation to roll out testing. The news that the prime minister was admitted to hospital while still struggling with the virus only served to heighten this political unrest – not helped by the appointment of Keir Starmar’s appointment as leader of the Labour Party, which he began by immediately striking a more conciliatory tone towards the government than his predecessor.
With the health of family and friends at the forefront of most people’s minds right now, it wouldn’t be surprising if the beginning of the new tax year yesterday passed unnoticed. Making early use of the investing tax breaks, however, offers the potential to give you a better position when the markets eventually recover; it would be wise to begin thinking longer term towards this end.
There wasn’t anything surprising in the Budget, announced last month, with the speculated changes to pensions tax relief proved to be just that – it wouldn’t be surprising however if this has simply been put on hold for less troubled times; something to look forward to in the Autumn Budget, perhaps? Most people can therefore still get tax relief on pension contributions worth up to £40,000 per tax year (or 100% of earnings, if less). There is also some relief for higher earners, including those in the NHS, with a raised threshold for the tapered annual allowance.
While the ISA allowance is unchanged from £20,000 for this tax year, an unexpected rise in the Junior ISA allowance sees it go up to £9,000.
As set out in previous legislation, the Inheritance Tax residence nil-rate band has been increased to £175,000, although the government has resisted any further changes in spite of proposals to simplify the rules. Change still remains on the agenda, however, which makes now a good time to review making lifetime gifts before tax rules are ‘simplified’ into something less generous.
The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and the value may fall as well as rise. You may get back less than the amount invested. The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.
In the picture
It’s time to think long-term – the range of short-term returns on equity markets has always been extreme, but the key to achieving steadier returns and reaching your financial goals lies in thinking ahead.
The Last Word
“While we have faced challenges before, this one is different. This time we join with all nations across the globe in a common endeavour, using the great advances of science and our instinctive compassion to heal. We will succeed – and that success will belong to every one of us”.
Queen Elizabeth II, speaking in a televised address over the weekend.
Magellan and Schroders are fund managers for St. James’s Place.
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