Equity markets slipped back a little last week but have started this week on an upbeat note. While far from back to normal, market volatility has subsided somewhat with 5-10% daily moves no longer the norm. This easing in market stress, along with the 15% bounce in markets in late March, is encouraging although only up to a point. Equities saw similar recoveries on a couple of occasions following the collapse of Lehman Brothers in 2008, only then to hit new lows several months later. Markets could therefore well retreat again near term. Indeed, last week’s economic numbers painted a dismal picture. Global business confidence collapsed in March back close to the lows of the Global Financial Crisis. Meanwhile, a surge in applications for universal credit in the UK and jobless claims in the US highlighted the rapid rise in unemployment in both countries.
A considerable amount of bad news, however, is priced into markets which still remain some 25% below their February highs. The key question now is not so much how deep the fall in activity is – and it will be deep – but how long it lasts and how much long-term damage it will do to the economy. The immense monetary and fiscal stimulus now put in place should help contain the economic fall-out, notwithstanding the immediate problems being encountered in implementing the support measures. Still, a recovery in activity will ultimately depend on a slowing in infections and easing of containment measures. There is no sign of this yet in the UK and US. But encouragingly in countries such as Italy and Spain infections rates are slowing and there is talk now of an easing in lockdown restrictions later this month. Importantly also in China, there is still no sign of a secondary surge in infections as the country returns to work. All the same, there still remains a great deal of uncertainty as to how soon, and to what extent, the lockdowns will be relaxed – not least because of the lack of clarity on the timing and effectiveness of much more extensive testing both for the virus itself and antibodies to the virus.
We have put together a range of indicators to assess how near we are to a bottom in markets and will be monitoring them closely over coming weeks and adjusting our positioning accordingly. While we remain cautious near term, we continue to believe that equity markets in a year’s time should be higher than now, possibly significantly so. We remain invested for the longer term and believe investors should continue to hold their nerve.