Last week’s equity market weakness continued yesterday, as the growing fear of a second wave of coronavirus infections was compounded by Larry Kudlow (an economic adviser to Donald Trump) after he said the $600 weekly unemployment benefits will stop at the end of July, because they are a disincentive to return to work as the US economy starts to recover.
The FTSE-100 closed down just over 40 points or 0.66%, at 6,064.70. However, this was well above the day’s low of 5,952 (when the index was down nearly 2.50%), as US markets started to reverse their own early falls: the Dow Jones, which had been down nearly 800 points, or 3%, early in the session, actually ended the day up 157 points, or 0.62%, after the Fed announced it will begin buying a broad spectrum of corporate bonds.
As we have previously stated, equity markets often tend to overshoot on both the upside and downside and we actually believe that the sell-off over the past week simply reflects the fact that the recent equity market gains got a little overheated – for example, this time last week the FTSE-100 was standing just shy of 30% above its March low.
Although market volatility will unfortunately remain elevated in the short-term, the current glass ‘half-empty’ view (with market sentiment inaccurately concentrating on the increased absolute number of coronavirus cases – which we believe is simply due to the massive increase in testing), is unlikely to be sustained.
While we fully understand and appreciate that the past week’s falls may be unsettling, we believe that the path of least resistance remains higher for equities, simply because equity prices (and economic growth), will be supported in the long-term by the unprecedented government and central bank stimulus, coupled with the economic reopenings we are seeing around the world.
In fact, data yesterday (Monday 15 June 2020) from the US clearly shows that the economic contraction has already bottomed, while forward looking indicators are turning positive, suggesting the recovery is probably already underway: the US Empire State Manufacturing Survey for general business conditions improved for a second month, recovering to -0.2 in June. Although a reading below zero doesn’t signify growth (zero is the line dividing expansion and contraction), consensus expectations were for a reading of -29.6, given it was -48.5 in May and at an all-time low of -78.2 in April.
The survey also showed manufacturers were optimistic about economic conditions over the coming six months, as the general business index reading rose to 56.5 – its highest reading since October 2009, with outlook readings for capital expenditure and technology spending also suggesting expansion (3.1 and 6.3 respectively). Furthermore, the report also indicated that manufacturers were planning to increase their workforce in the coming months, with the reading jumping to +19.0.
Additionally, today’s UK employment data was encouraging as it shows that the government’s furlough scheme is helping to keep a lid on unemployment. While claims for jobless benefits rose by 529,000, this number also includes those people who are employed with low income or hours. The headline rate for unemployment was unchanged at 3.9%.
This data also provides us with confidence that while this will be the deepest recession in history, the recovery will be ‘V-shaped’ – thus making it one of the shortest recessions in history.
Consequently, it is important to resist the urge for any knee-jerk reactions and maintain a long-term perspective by looking past the negative TV and newspaper headlines we are currently seeing.
Investment Management Team