The virus persists
Boris Johnston has returned to work this morning and on first glance appears to be a far slimmer version of himself from a few weeks ago, evidence, if it was ever needed, of the severity of the personal impact of Covid-19. As at the time of writing the UK has 20,800 deaths which were based on hospital counts of those infected. This figure does not include those from nursing homes which based on experience in other countries including Ireland, could be increased by a further 50%. His warnings about the need for continued social restraint this morning are based on the fear of a possible death toll of 100,000 for the UK if the lockdown is released too liberally.
With nearly one million infected and fatalities likely to equal the Vietnam War tally of 58,318 (albeit over a 17 year period), the US too has a dilemma about reopening its economy. The big risk for the US is that opening each State’s economies may not be co-ordinated on a social distancing basis and that individuals will flaunt the warnings from health professionals. This is made even more difficult as US internal flight traffic is allowed to continue uninterrupted.
The WHO advised over the weekend that there is no evidence that any infected person, once recovered, would have an immunity which would last any considerable period. As a comparator, even the Winter Flu can reoccur in an individual due to an infection from a slightly different strain and there are at least three known variants of Covid-19 in circulation on a global basis. While testing for a vaccine has started it is a difficult research process and will probably take 10 months before it can be mass produced. The big question is how many have actually got infected above the official tested statistics and are asymptomatic? Herd immunity, as temporarily floated by the UK government some weeks ago, may still be put back on the global agenda with a prospect of a further huge death count in very short periods of time.
Tentative schedules are being drawn up worldwide for restarting economies but the R0 figure is uppermost in all public health experts’ minds. Even such openings will carry risks of infection spreading again within communities leading to further shutdowns and the economic uncertainty which will bring a considerable risk of ending up with the worst of both worlds. On the one hand reopening businesses and society carries a considerable risk of another spike in infections and deaths. On the other, maintaining strict social-distancing and stay-at-home mandates comes at a considerable economic cost. Added to this is the growing realisation of health consequences that at worst manifest themselves in mental anguish, domestic violence and opioid addiction.
An interesting 7 days in the markets
The US Treasury Secretary, Steven Mnuchin, announced that most of the US economy would be re-opened by the end of August, which is probably later than most people had anticipated even up to a week ago. Allied to this, the US equity market did not appear to lose much ground last week but these relatively positive noises hide a multitude of overlooked facts. 26.5 million jobs have been lost in the US in the last five weeks and this compares with circa 9m jobless caused by the Great Financial Crisis 12 years ago. While the S&P 500 is around 17% below its mid-February record, the median stocks are trading some 28% from their peak as the six largest companies make up over 15% of the index’s market capitalisation. Two of these, Amazon and Microsoft, are outliers as they are doing considerably more cloud based business on the back of the Covid-19 crisis.
To date only 20% of companies that had reported earnings were giving some guidance for future earnings but even then it will remain to be seen if these reflect hope rather than a firm assessment. For the rest, market analysts are using second-tier metrics such as liquidity and leverage to try to put a value on equities. This approach will probably lead to further volatility in pricing, and stockmarkets, in the coming weeks.
Coming up this week and beyond
This coming Wednesday will see the first scheduled Federal Open Market Committee (FOMC) meeting since January, (the Fed has made two surprise meetings/announcements since then instead). Key to their analysis of the current situation will be their use of alternative sources of data to get a sense of the real-time impact such as credit-card transactions and Google searches about unemployment benefits. Current market estimate for the US Q1 GDP growth is to be circa -3.7%. Second quarter projections will be a lot more difficult to guess at this point in time. It’s also a big week for corporate earnings, with 34% of the S&P 500 due to report for Q1 with the likes of Microsoft, Alphabet, Amazon, Apple and Facebook in the limelight.
In broader issues, most financial sectors are priced for a recession – just look at government bonds, gold or oil. Equity investors have gotten a little bit ahead of themselves. The longer the lockdown, the greater the damage to current and future economic well-being and the higher the risk of market instability. Even based on what we know to date, global economic data is expected to continue to deteriorate strongly over the coming months. The key issue is consumer confidence and the ability of small businesses on a worldwide scale to bounce back. Without cashflow such businesses cannot survive and with their struggles or demise comes increased unemployment and reduced economic activity and, lest we forget, reduced tax inflows for every government on the planet. Money makes money go round which is why there have been trillions of government handouts to date. Expect many trillions more to be made available globally.
“Nobody rings a bell at the top or the bottom of a market” (Wall Street saying)
Each day that it trades, the New York Stock Exchange opens to the sound of a bell and then closes to the sound of a bell – you may have even seen it covered on the CNBC Business News Channel. This particular saying seems to date back to circa 1900 and, like the bell, is still in use today. The graph above is courtesy of Standard Life and charts the rise in value of a €10,000 investment in their Managed Fund since 1982. Managed Funds typically have only 65%, at most, in equities and yet this fund being so diluted still illustrates the importance of getting in and staying in the stockmarket.
While many of our clients will not have invested for 40 years some of you will have the best part of this ahead of you either as someone at the start of their career or someone in mid career who will then retire and quite probably have a long number of years in retirement. This brings me to another popular investment saying which is “It’s about time, not timing”.
Investments are coming on sale now and it is time to act as markets will move backwards in the weeks ahead.