June 2, 2020

Covid-19: Update on its Impact on Financial Markets – 2 June 2020

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“Should I Stay or Should I Go?”

Some weeks ago we mentioned the dilemma that politicians worldwide faced on when and how to open up their economies and their communities as the timeline moved on with the virus. Those of you reading this update that are old enough to remember this song from The Clash in 1982 might also remember the line in it of “If I go there will be trouble and if I stay it will be double”. Opening up too early means that they run the risk of an infection resurgence and far more deaths not to mention the economic impacts. If you have any confidence about no such resurgence occurring then reflect on the growing gatherings of 10 or more non household individuals at beaches and parks in the last 2 weeks. These crowds are not just an Irish experience and are happening worldwide as patience starts to run out for lockdown measures. As lockdowns are eased globally the next 4 weeks will tell a lot in terms of ongoing infection figures.

US unemployment is now at over 41 million and while this includes furloughed staff the effect of bankruptcy on many small businesses as well as some large retailers means that a reversal of fortune won’t happen quickly and the much vaunted “V” recovery is now likely to be a broader “U” shape whenever it starts to happen. The original scenario of short term economic disruption impacting Quarter 2 only is a far away thought at this point in time. The truth is nobody really knows about the economic impact and the financial picture will likely shape up, for good or bad, in the coming month and will be informed by reinfections or lack of them.

On the Plus side, confidence has returned globally. The VIX index which is a measure of stock market volatility, is back at a measure of 28 , down from 88 three months ago, low readings signifying calm

Trump, Trump, Everywhere

Stockmarkets are increasingly about Trump – ignoring him or reacting to his every utterance. On the negative side are growing Covid-19 deaths and the likelihood of increased US community based infections especially in the coming weeks following the protests marches of the last week, social unrest in general , noises about imposing tariffs on Hong Kong manufacturing, economic turmoil caused by Covid and ironically the prospect of Trump losing the election.

On the positive side you have the hope that Covid-19 has been overcome as countries in the Developed economies start on a phased return to what existed before these things happened. This is the only driver of recent stock market strength and shows a blind faith in the hope for speedy vaccine development and the ability of global populations to stamp out the spread of the virus by appropriate social distancing and hygiene routines. The stock market rises run counter to the fact that negative interest rates are everywhere, bond market prices are getting higher and the contra “investment” of Gold is 20% higher than early March.

Starting with Trump possibly losing the election might seem like a  positive  for  many,  even  among  some  Republican party members, but this is a man who set out his stall on the strength of both the US economy and stockmarket. Covid has definitely impacted the US economy as it has elsewhere, and the US stock market  as measured by the broad Russell 2000 index and the S&P 500 are both in positive territory since his 2016 election   albeit at far lower levels than previously. This is the only card he has left allied to his now anti-China stance on Covid, the latter being an attempt to deflect attention away from his own healthcare failures.

Trump’s rhetoric about imposing tariffs on Hong Kong is an attempt to play to his voting constituency but the reality is the export of manufactured goods to the US from Hong Kong is miniscule which is why stockmarkets ignored him last week.

Ironically, the downside of a Trump defeat in November is that his tax cuts for the wealthy that brought growth to the US stockmarket may possibly be reversed by Biden both on a policy basis and through necessity. The current level of Covid-19 bailouts stands at US$ 3 Trillion and will likely grow in the coming months, dwarfing the US$ 700 Billion Troubled Asset Relief Program needed at the height of the Global Financial Crisis. Quantitative Easing needs to be paid for and just can’t be borrowed out perpetually in the future especially if inflation continues to be low.

Despite the strength of the US Dollar against most international currencies its recent weakness against the Euro  (4.5% in the last 3 months) due to relative confidence in the European Commission proposed a plan for a rescue   fund, leaves Euro based investors such as ourselves with recent lower US market returns relative to our American counterparts.

Where To From Here?

Once the social unrest issues of the last week abate (and they will irrespective of the handling of the protest marches) the continued threat of mass unemployment and deep recession as well as the US China geopolitical tension may keep nerves frayed. And in case you forgot, BREXIT is still with us and 2020 could well be Boris’ Annus Horribilis with the Covid fallout and the likelihood of talks getting obstructed by the inability of parties on both sides of the negotiations to physically meet.

This may all sound doom and gloom but Stockmarkets have a habit of providing surprises, the recent bounce from March 23rd being a case in point. Many individual shares are very cheap right now because of a lack of confidence based on their sector, travel and hospitality being the main areas of concern. Over time, things will right themselves and for those who are invested directly or through their pension funds, our advice is to stay invested.

For those with new monies, a drip in strategy over some months may be an approach to consider as market rises never happen in a continuous upward curve.

June 2, 2020
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