Market Commentary – June 2020
By Neil Worsley, Investment Strategist
Global equity markets continue to grind higher in the face of bad economic news, company dividend cuts, profits downgraded by nearly 30%, political crisis such as that in Hong Kong which threaten an escalation of US/China tensions and social unrest. Earnings for US equities have been downgraded to an extent that the forward price earnings multiple for 12 months out is now over 25x with profit estimates continuing to decline and the economic news about to get worse: So why is this happening and confounding many investors and forecasters?
There are a number of points to consider. While the economic news is awful and likely to get worse the S&P is down little more than 5% year to date, although this has been aided by the huge technology weighting which has been the beneficiary of the present economic events. However, other global equity markets too have rallied strongly from their lows in spite of continued deteriorating economic conditions. A major contributing factor to this strength is the speed and overwhelming financial action taken by central banks and governments to tackle the pandemic. Unlimited central bank liquidity has been unleashed to confront the crisis with massive quantitative easing programmes reinstated/increased in eye watering amounts with both private and public debt purchases and government intervention to prop up failing industries the like we have never before seen. Trillions upon trillions of dollars (around $20 trillion so far committed) are being used in order to prevent economic meltdown, which also includes personal funding to assist households through the downturn. In short, whatever it takes. This is also causing dislocation in the bond markets as central banks buy any amount of government bond issuance, which is almost creating a false market for other debt instruments. It is also causing investors to buy selectively, into equities as the paltry bond yields make more secure stock payers look attractive This overwhelming and spectacular intervention has then had the desired effect, at least for now. The old saying of don’t go against the Fed still holds true; but will the stimulus continue to have the desired effect over the longer term?
As economies reopen it will quickly become evident that the old normal is gone, at least for the time being. The shock of the sharp monetary stimulus will begin to lose some of its impact as unemployment numbers begin to climb and companies wrestle with these new conditions. There is certainly likely to be a strong economic rebound in Q3 of this year but that will be from an extreme base and I am not a believer in a straightforward V shape recovery as it is unlikely that economies will reach previous levels for some years. However, the big question is can a solid economic recovery begin before the central bank support wanes or financial markets lose faith? That is the real question and it will take strong investor nerves to believe this but stranger things have happened and there will be many twists and turns along the way.
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