Covid-19 Market update – 08/07/20

In the past month, we have seen the slow release from lockdown across the world, moving from civil unrest and widespread protests, right the way through to being able to go to the pub, play golf and get a haircut. The FTSE 100 is currently holding at around 6250 having crept close to 6500 early in June and our overall outlook is still ‘cautiously optimistic’.

The situation in America

The US officially went into recession earlier this year, ending the longest economic expansion ever recorded that started in 2009. The longest recession was in 2008 triggered by the Global Financial Crisis which included reduced lending by banks, credit seizures and the housing market being stretched.

Banks are better placed this time around and supply and demand in the housing market are more balanced. Mortgage applications are up and payroll reports show people getting back to work. The shortest recession was from January – July 1980 and forecasters believe that the current recession will be shorter than that.

The St Louis Fed Index measures financial variables and conditions in the States. This currently shows that the Federal Reserve’s stance has been successful and credit markets have stayed open with a strong rebound being supported. The US is still considering a $1 trillion infrastructure spending package for roads and bridges, 5G and rural broadband. US retail sales were up 18% which is twice more than forecasted. With mortgage approvals surging and mortgage interest rates down this has also helped the market.

This all leads to a solid pickup in the US economy however this is already priced into the market. Forecasters are expecting moderate market gains over the next six months with the key issues being the tension with China and a possible significant second wave of the virus, although this is likely to lead to more localised lockdowns rather than a nationwide lockdown. The long-lasting effects of high unemployment cannot be ignored but a sharp bounce back is expected at some point.

Interest rates are likely to remain low for some time and with no inflationary risk over the short term, the Federal Reserve can continue with the expansion of monetary policy for a longer period of time, enabling growth to continue picking up.

The situation in the UK

In the UK inflation fell to 0.5% in May, and we are not sure if it will ever go to 0%. GDP fell by 20% which is the largest contraction of economic growth on record. A GDP fall of 18.5% was expected. This highlights that this is the sharpest recession that we have ever seen but it could also be the shortest.

The Bank of England has increased the bond-buying programme in June from £100 billion to £750 billion, which was less than expected and is due to be complete by the end of this year No further Quantitive Easing or purchasing of Bonds was voted for after this round (next year or the year after).

Unemployment was low due to furlough which was expected but unemployment is likely to increase significantly as furlough ends and we are already seeing signs of that in July. Unemployment is expected to be around 8-10% by year-end (normally between 3% and 4%) and anything over 10% may have a negative impact.

Like in the US, Boris has announced a ‘Build, Build, Build’ strategy to help the UK economy recover with significant infrastructure investment on the cards. As we come out of lockdown, retail sales have picked up quite dramatically alongside increased electricity usage and traffic on the roads. All of this is consistent with the sharp recovery expected.

A Glance at the Markets

Equities may trade moderately higher for the rest of the year but with volatility possible with increases in virus cases and localised lockdowns as previously stated. This will have less of an effect on asset markets than we saw in March when the whole country went into lockdown.

For example, June had some bad days. In one day, the market was down 4% due to some southern states in the US going into lockdown and case figures increasing in the north of the UK. Beijing also declared 39 new cases having gone 55 days with no new infections. This will continue to happen for the rest of the year where the market falls very quickly followed by a sharp rebound.

The fear that a second wave may happen keeps rearing its ugly head but global recovery is improving and equity investors can see this. Any new lockdowns will be less severe due to several factors:

  • Antibody testing
  • Mask wearing
  • Test and Trace in most countries across the world
  • Part of the Population now has immunity
  • Better response from the general public

Inflation

Inflation is not a risk for the next six months but it may be hard to control inflation in the future and over the longer term. The effect of government spending will probably be evident and the austerity measures that we saw from 2009 could happen again. However, these may be less severe but for a longer period of time.

In summary

Taking into consideration all of the information we have received from various fund managers throughout this trying time, we are happy that the market has performed as forecasters have expected and remain confident in the expectations for the rest of this year. There are positives to be taken and here at gpfm we will continue to ensure that the financial plans we have created remain right for each and every one of you.

Everyone at GPFM is still working effectively and efficiently from home, with no plans to change that in the immediate future. We are open for business as usual and if you need any additional advice or know of anyone who would benefit from our services, please do get in touch.

If you would like to speak to an adviser, please give us a call on 01992 500261.