WeeklyWatch – Investor optimism buoys markets, but is volatility looming?

24 August 2020

Stock Take

Investors hopeful for a positive autumn

Last week was relatively quiet on global markets – which may be representative of investors’ tentative optimism about the COVID-19 situation. While a second wave cannot be ruled out (especially with cases rising in certain hotspots), many countries seem to have dealt effectively with the pandemic – and investors appear to be confident that the virus is being contained.

This sense of optimism is one reason why the US stock market reached its highest ever point last week. Just a few months after its plunge in March, the S&P 500 index has recovered its losses to reach an all-time high. Indeed, it seems that investors are waiting for markets to come back to life at the start of September, according to Mark Dowding of BlueBay Asset Management, Co-manager of the St. James’s Place Strategic Income fund. He continued:

“Despite daily data on infection numbers, there is now a sense that we have become used to living with this. At the same time, mortality rates continue to drop, as treatments become more effective and the virus shows signs of mutating into a less deadly form. Healthcare systems are far from overwhelmed and in many countries, hospitals are sitting eerily quiet.”

The calm before the storm?

That said, it is prudent to remain cautious – especially as economic data released last week revealed a mixed bag of news about the world recovery. Advanced economies are at different stages of dealing with the virus, but those countries that implemented job retention schemes (like in Europe and Japan) can soon expect unemployment to rise, argues Capital Economics:

“The bottom line is that, with labour markets weakening, the so-called “easy” part of the recovery is probably reaching an end”.

Some investors are also worried that the exuberance in global stock markets doesn’t reflect the health of the world economy, which is still reeling from the pandemic. The recovery in share prices has also been very mixed – while large tech companies have responded well, lots of traditional businesses are still struggling.

There are also plenty of events on the horizon that might soon begin to unsettle markets after the brief summer lull – not least the deadline for a trade agreement between the UK and the EU. Although the talks resumed last week, they failed to make progress; time is beginning to run out to get the deal done.

Another factor is the looming US election race, which will soon enter its final phase. As the 3rd November date approaches, there’s an increasing chance of the race causing market-moving events. See ‘In the Picture’ to view what has happened in previous elections.

Joe Biden formally accepted the Democratic presidential nomination last week and is currently the favourite to win the election. And, in a sign of the battle heating up, last week saw Trump claim incorrectly that the House Speaker Nancy Pelosi would become President if the election result is delayed due to mail-in voting.

 ‘This is not just adapting…’

The COVID-19 pandemic has accelerated pre-existing trends – especially when it comes to retail, where many businesses were already changing how they operate, but, due to the virus, they’ve had to adapt much faster.

One of those businesses is UK retailer Marks & Spencer (M&S), which has been trying to boost online sales for some time. Back in February 2019, it bought 50% of online supermarket Ocado’s delivery arm, in order to reach more customers through its network. That tie-up begins next month – and may prove an example of a business having effectively predicted a consumer trend.

M&S also revealed last week that it will be cutting another 7,000 jobs over the next three months. The company is one of many retailers to announce redundancies due to falling sales in its physical stores.

Shopping habits were already changing before the pandemic: the ‘death of the high street’ is a well-worn phrase in British journalism. But the national lockdown, plus consumer fears about catching the virus, has made many people spend more money online in recent months. The increase in online shopping is one reason why UK retail spending, according to data for July released last week, is above pre-pandemic levels, adds Capital Economics.

So, while the future of retail spending is still uncertain, the companies that do best in the next few months and years will be ones that adapt well to the ‘new normal’.

Wealth Check

Expecting the unexpected is just one lesson we have learned from the pandemic – especially when it comes to our retirement plans. It’s also taught us the importance of having strategies in place in case things go wrong.

In a climate of widespread redundancies, some people will have been faced with the prospect of retirement a bit earlier than expected. Others are opting to work for longer, taking a more phased approach to retirement, or even returning to work as they look to bolster their savings.

Indeed, a new study by Co-op Insurance suggests that COVID-19 has already impacted the retirement plans of almost a fifth of over-50s.¹ A quarter of those said they’ve been unable to retire when they’d planned due to their finances, while more than a fifth of respondents say they have had to dip into their retirement savings early.

In addition, over a quarter of over-50s felt they needed to make up for time lost due to the pandemic, and over a third said they now intended to retire sooner to give them more time to enjoy life.

That’s a great plan, but it’s only realistic if you’ve got a big enough retirement pot in place.

For future generations of retirees, the financial impact of the pandemic has underlined some vital principles: save earlier, save more into your retirement fund, and make sure you have a sufficient emergency fund. (73% of respondents to research from Cushon said they now saw saving into an emergency fund as equally as important as saving for the longer-term.)

It’s important to evaluate the impact of unexpected events such as COVID-19 can have on your financial objectives and vulnerability – all the way up to (and through!) retirement. And that’s where an experienced financial adviser can help.

¹ Research was carried out on behalf of the Co-op by Atomik research among 2000 UK adults aged 50 and over.

In the Picture

Investors might see markets become more volatile ahead of the US election on 3rd November, but what happened in the run-up to past elections?

The Last Word

“We do not have a zero-sum approach to prosperity, and especially in times like this, we’re focused on growing the pie, making sure our success isn’t just our success.”

– Apple CEO Tim Cook avoids sounding too jubilant about the company’s value reaching $2 trillion.

The information contained is correct as at the date of the article.

BlueBay and Schroders are fund managers for St. James’s Place.

The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.

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