As staunch proponents of long-term investing, it is rare that we would encourage investors to focus on market movements spanning just a matter of days. However, the week that has unfolded thus far has almost been an illustration in miniature of the issues that have occupied our thoughts of late. Unusually, perhaps, focusing on the past few days may provide some insight into the longer-term outlook for investors.
European stock markets began the week on the back foot with UK, German and French indices falling 3% or so on Monday as fears of a second wave of Covid-19 infections escalated. In a microcosm of March’s sharp market sell-off, shares in the travel and leisure sectors fell hardest, while those of supermarkets and pharmaceutical companies proved relatively resilient.
New cases have been rising across Europe and the UK at an accelerating pace. As explained by the government’s scientific advisors on Monday night, infections in the UK are thought to be doubling every seven days or so – a troubling pattern with the winter flu season just around the corner. Consequently, social restrictions have been reintroduced here, and in many parts of Europe too: 850,000 residents of Madrid find themselves back in lockdown, while in the UK we are once again encouraged to work from home and discouraged from interacting in large groups.
With investors rattled by developments in Europe and fearing a repeat of the turmoil seen in March, it was something of a relief to see the US stock market fall “only” 1% on Monday. European investors subsequently regained some of Monday’s losses in Tuesday’s trading. Though the need for increased social restrictions suggests that a long, hard winter may lie ahead, we see some sense in the market’s rejection of a March-style scenario. Though Covid-19 infection rates have been rising, hospitalisation and mortality rates have thankfully remained relatively subdued. This limits the risk that national health services will be overwhelmed, allowing governments to pursue less draconian measures to control the virus than those required during the initial surge of infections. While these less stringent measures will undoubtedly still slow the economic recovery, their impact should be much less severe than the juddering halt to activity that was ordered six months ago.
Wednesday’s trading got off to a bright start, with the FTSE All Share index of UK stocks at one point recovering to just 1% below where it started the week. However, the momentum was lost as data emerged suggesting that the economic recovery across much of the developed world had already begun to stall, even before the renewed social restrictions have made their mark. Concerns over the economic outlook have been emphasised by central bankers in the UK, Europe and the US who, in one form or another, have restated their commitment to exceptionally loose monetary policy (for example, low interest rates and ongoing ‘quantitative easing’) while warning that additional fiscal support (for example, additional government spending on job support schemes) is also required.
With bipartisan co-operation already in short supply and a presidential election just over two months away, questions were already being asked over the ability of US legislators to agree to a new economic stimulus. The death of Justice Ruth Bader Ginsberg has opened a new front in the hostilities between Republicans and Democrats and, among many other important things, makes it less likely that new fiscal support will be secured before November’s election. Concerns over the economic outlook have therefore escalated, prompting expectations for future inflation rates to decline and sending the price of gold sharply lower. Meanwhile the US dollar – the world’s go-to “safe haven” financial asset – has begun to strengthen again having weakened markedly since March.
The S&P 500 index of US stocks dropped 2% on Wednesday as the economic outlook darkened. Meanwhile, the technology-heavy Nasdaq Composite index fell 3%. While seemingly inoccuous, these relative moves are contrary to the established narrative of the past few months and even years. US technology companies have largely been considered masters of their own destiny, immune to the impact of slowing economic growth. Furthermore, many are seen to benefit from the brave new world of lockdowns and social distancing: shares of these companies have typically performed better than the broader market when the pandemic threat has worsened. The technology sector’s decline on Wednesday may hint at concerns that stocks in this area of the market have simply become too expensive.
Back in the UK, the FTSE All Share index fell more than 1% as the market opened on Thursday. However, the index subsequently rose through the morning as details began to emerge of UK Chancellor Rishi Sunak’s latest plans to support the economy. As regular readers will be aware, we have long held the view that policymakers will continue to do “whatever it takes” to limit the economic fall-out from the coronavirus. However, we have cautioned that the scale, shape and timeliness of policy support is unpredictable, and that bad news may be required to galvanise political support for new measures. Sunak’s postponement of the Autumn budget – previously billed as transitioning policy from protecting the economy to supporting it – in favour of an immediate package of wage subsidies and business loans provides an opportune example of these forces in action.
Our belief that policymakers will succeed in limiting the economic damage of the coronavirus, coupled with stock market valuations that we consider reasonable, leads us to a cautiously optimistic outlook for long-term investors. It would therefore be convenient to end this update on a positive note, with a timely policy response brightening the economic outlook and lifting asset prices. Alas, Thursday had one more twist in store as weekly data showed an unexpected increase in the number of Americans claiming unemployment benefits. This reminder that the economic recovery will not be smooth, and that policymakers must do their utmost to protect it, set share prices into retreat once more.
Though US Treasury Secretary Steve Mnuchin subsequently buoyed sentiment with the prospect of additional stimulus measures, the surge in share prices petered out as investors once again questioned US legislators’ willingess to strike a deal. By their closing bells, the UK stock market was down over 1% for the day while the US ended with a small gain. Four days into an eventful week, UK and US stocks sit some 2-3% below where they started.
While the scale of stock market movements this week pales in comparison to the shifts seen in March, it has nonetheless been an eventful week, and one that may have tested the patience and resilience of many a shareholder. Unfortunately, we suspect that investors should brace themselves for further episodes of turbulence as the tug of war between the coronavirus and policymakers’ response to it plays out. However, we would – as always – encourage investors to retain their focus on the long-term. Guided by valuations that for the most part appear reasonable, we believe those willing and able to endure the short-term trials and tribulations of stock market investing have reason to look forward with a degree of optimism.
Deputy Chief Investment Officer, Omnis Investments Limited
Issued by Omnis Investments Limited. This update reflects Omnis’ view at the time of writing and is subject to change. The document is for informational purposes only and is not investment advice. We recommend you discuss any investment decisions with your financial adviser. Omnis is unable to provide investment advice. Every effort is made to ensure the accuracy of the information but no assurance or warranties are given. Past performance should not be considered as a guide to future performance.
The Omnis Managed Investments ICVC and the Omnis Portfolio Investments ICVC are authorised Investment Companies with Variable Capital. The authorised corporate director of the Omnis Managed Investments ICVC and the Omnis Portfolio Investments ICVC is Omnis Investments Limited (Registered Address: Washington House, Lydiard Fields, Swindon, SN5 8UB) which is authorised and regulated by the Financial Conduct Authority.