Yesterday, global equity markets fell heavily, with the FTSE-100 down 252 points – just shy of a 4% loss. On Wall Street, the Dow Jones lost over 1,800 points, or nearly 7%, while the broader S&P 500 index ended the day almost 6% lower.
However, there was no specific bad news driving these falls, just worries that there could be a second wave of coronavirus infections.
Although some US states, such as Arizona and Texas, have seen an increase in coronavirus cases, on a national level cases continue to fall, albeit slowly.
While we don’t want to sound blasé, we don’t believe long-term investors need to be overly worried about yesterday’s sell-off – as we have previously warned, the path for equity markets will not be smooth and that we fully expect market volatility will remain elevated. Although we appreciate that this equity market volatility will be unnerving, it is very important to maintain a long-term perspective and resist the urge for any knee-jerk reactions as there will always be periods of market uncertainty and volatility and this current period is no different – that is why my wealth takes a long-term approach to investing, as evidence shows that this leads to better performance as time in the market is more important than trying to time the market.
As for yesterday’s economic data, there was some good news as both US initial and continuing jobless claims fell. In fact initial claims during the week ending Saturday 6 June 2020 slowed for the 10th straight week to 1.54m – a clear sign that demand for unemployment benefits is slowing as states across America continue to reopen.
Disappointingly, while continuing claims also eased, it didn’t decline quite as much as we would have liked after last Friday’s (5 June 2020) stunning employment data (please see here) which showed employers added 2.5m workers. Continuing claims dropped to 20.9m from a revised 21.3m the prior week, with a number of states, including California and Florida, reporting sizable increases.
While the quote from John Lennon springs to mind: “the more I see the less I know for sure”, we have to remember that this is the biggest economic global shock in living memory and as such some of the data that is being reported may appear confusing, simply due to timing and short-term distortions which we need to make sense of. For example, California announced at the end of May that it would be hiring nearly 2,000 additional staff to help process the huge backlog of unemployment claims – hence why we saw an increase in claims from California. Additionally, part-time jobs can also distort readings, as they would be regarded as employed (in last Friday’s employment data), but they may still be eligible to claim benefits (and so are also included in yesterday’s continuing claims data).
At the end of the day, while the headline data isn’t declining as quickly as we would prefer, the consistent message from this data is that Americans are returning to work as businesses reopen and therefore the worst of the coronavirus layoffs is clearly behind us – which is supportive for equity markets.
However, we just need to be mindful that we are only just at the start of a long road ahead back to full employment and that some demand has obviously diminished. For example, while restaurants may have started to reopen allowing staff to be rehired, unfortunately social distancing means that restaurant capacity will be lower and as such they won’t require all of the staff they previously employed.
As for today, we have had lots of data out of the UK, including GDP, industrial and manufacturing production, construction output and the trade balance.
All in all, none of it was a surprise to us as it simply underscored what we already knew – i.e. the economy has hit a brick wall thanks to the coronavirus lockdown restrictions. For example, GDP data for April showed that the UK economy contracted by 20.4% – and as we wrote on Wednesday 13 May 2020 (please see here), we wouldn’t be surprised if Q2 GDP contracts by 25 or 30%.
Regular readers of our commentaries, will know that we believe that while we will experience a sharp and painful economic downturn, it should also be relatively short with a sharp acceleration on the other side of this horrible coronavirus outbreak as much of our expenditure is only delayed – hence our view that we will start to see an economic recovery towards the end of the year. As a result, while UK GDP will be negative for 2020, it may only be in the single digits or low double digits, while 2021 could be one of the strongest years since the global financial crisis is 2008/9.
Investment Management Team