If you ever needed proof that time in the market is more important than trying to time the market, we have had it over the past couple of days!
On Monday (15 June 2020), the FTSE-100 fell heavily (to 5,952) as news headlines were dominated by stories of a potential second wave of coronavirus cases. However, roll forward to today and the FTSE-100 is trading at 6,300 – a rise of almost 6% – supporting our statement that the path of least resistance remains higher for equities due to government and central bank stimulus, coupled with the economic reopenings we are seeing around the world.
This dramatic turn (which would have easily been missed if you were trying to time the market – as a bell doesn’t simply ring at the top of the market indicating it is the best time to sell, or at the bottom, indicating it is the best time to buy), is due to a multitude of positive announcements: the US Fed said that they will start buying US corporate bonds; news that Donald Trump was considering plans for a new $1tr infrastructure bill (although we do have to caution that it may not get through Congress before the Presidential elections in November); and some very strong US and German economic data.
US retail sales data for May was super impressive – not only did it completely smash consensus expectations, but the data reading for April was also revised up: sales in May were 17.7% higher than in April (the biggest monthly rise on record), while April’s data was revised up to -14.7% from -16.4%.
Although sales are still 6.1% below last year’s level, the size and speed of the rebound is nevertheless amazing, especially as all categories increased in May. For example, sales of motor vehicles rose 44.1%; bars & restaurants +29.1%; electronics +50.5%; clothing +188%; and furniture +89.7%. This clearly shows that as US states ease lockdown restrictions and reopen their economies, American consumers are happy to quickly go out and spend.
As the consumer accounts for two-thirds of the US economy, this supports our view that this is not like a normal economic downturn as the coronavirus outbreak is a transient issue and as such, while we will suffer a sharp, deep and painful recession, it will be very short followed by a quick and strong bounce back – a ‘V-shaped’ economic recovery.
Additionally, Germany’s ZEW Survey (which gives an indication of economic sentiment and expectations) underscored our belief that the economy has bottomed and will recover in the second half of 2020, as the reading rose to 58.6 from 46.0.
In the UK this morning, headline CPI inflation slowed to 0.5% from 0.8% (its lowest reading since June 2016), while the core rate (which excludes volatile items such as food and energy) fell to 1.2% from 1.4%. As with our warning over US inflation last week, our typical basket of goods is being distorted by the coronavirus lockdowns so may not fully represent the prices we are actually experiencing.
However, looking at the individual elements, disinflationary pressures clearly exist which is likely to pressure the Bank of England (BoE) into further stimulus during their monetary policy meeting tomorrow (Thursday 18 June 2020).
In fact, we wouldn’t be surprised if the BoE gives a downbeat assessment on the UK economy tomorrow given the poor economic backdrop (last week’s GDP data reading showed the UK economy contracted by 20.4% in April, while today’s CPI inflation reading simply confirms its direction of travel, which has been one way since the end of 2017). Additionally, Brexit uncertainty is unfortunately back on the agenda.
Consequently, we wouldn’t be surprised to see the BoE act aggressively – either via an enlarged QE program or through negative interest rates. We will find out at 12 noon tomorrow (Thursday 18 June 2020).
Investment Management Team