Market briefing – 17th June 2020
Markets have rebounded strongly from their lows in late March. The degree of this recovery is somewhat surprising. In the US, for example, markets are now in positive territory for the year to date.
Much of the global market rally has been driven forward by policy responses from governments and central banks. As these interventions are nearing an end, it is likely that markets will need to absorb a significant level of negative news flows over the coming months.
Separately but related, government policy across the globe is moving towards sustainable investment. For example, both the UK and Europe are preparing budgets which are likely to favour these strategies. Meanwhile in the US, Joe Biden is ahead in the polls and he too advocates a more responsible approach to running society, one which both favours the disadvantaged members of society and places a greater emphasis on environmental issues.(1)
Is the thought of a Covid-19 second wave affecting a market recovery?
As the graph below shows …
… June started off where April and May finished; seemingly ignoring the predictions of economic gloom regarding the inevitability of a recession and the high cost in jobs from the lockdown.
Friday 5th June saw the FTSE 100 Total Return (TR)(3) return to its psychologically important marker of 6,000 points for the first time since 6th March. Although we didn’t know it at the time, 6th March was approximately halfway between the beginning of the fall, and later on in the month, on the 23rd March, the bottom.
However, it may be unfair to say the market is seemingly ignoring the economic indicators and isn’t worrying about coronavirus anymore. Since 1st June, the sentiment regarding the reality of those economic indicators of job losses and the depth of a recession actually occurring has started to bite. Therefore, June has seen the effect of the reality of these economic factors begin to impact the FTSE 100 Total Return.
As can be seen in the graph below…
… Friday 5th June saw the 6,000 point marker come and go, falling over 6% to just over 5,700 by Monday of this week.
Of course, Covid-19 concerns were the ostensible reason for the decline in the UK and this was the case once again on Monday morning (15th June). However, there are concerns internationally as well, as China seeks to quell an outbreak of the virus, with the World Health Organization saying that there were new cases in Beijing, and China warning that the risks of a new outbreak were very high(4).
Worries about a UK and an international second wave are only adding to concerns. Are they overblown? We simply don’t know. As economies continue to recover from their lockdown-induced slumps, any recoveries are conditional to the outbreaks remaining localised, and renewed lockdowns not becoming widespread.
Other concerns linger in the background. Stock markets on both sides of the Atlantic have become ‘used’ to massive fiscal stimuli should markets plummet. With the UK economy reporting unemployment nudging 3,000,000(5) for the first time in decades the pressure on UK government spending will only increase.
The continued uncertainty means that stock markets such as the FTSE 100 TR will be left to their own devices until the new normal, whatever that may be, becomes clearer. Do not be surprised if the rocky trading conditions and market volatility continue. For now, markets may not decrease as they did in late February and early March, but they may have reached the limit of the upwards direction for a while.
What should this tell you?
It is true that the short-term horizons and focus discussed above enhances uncertainty due to the unpredictability of the current situation. However, it is important to remember that we very often have a long-term investment time horizon.
As we have said before, we will continue to monitor the current financial situation and keep you notified of any changes that are made. Please seek professional financial advice if you wish to discuss your financial situation further.
(1) Based on information supplied by Square Mile Investment Consulting and Research Limited.
(2) FE Analytics
(3) FTSE 100 Total Return Index – measures the total return of the underlying FTSE 100 index, combining both capital performance and income – https://www.ftserussell.com/products/indices/uk
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