- The second quarter of the year sees an extraordinary rally in global equity and credit markets.
- Governments and central banks remain steadfast in their drive to beat the virus and get the global economy back on track.
- While the economic data remains very weak, some green shoots are starting to appear (better-than-expected US jobs figures).
- Businesses and the economy should start to benefit as lockdown rules are relaxed. But cultural shifts are becoming apparent.
- The second half of the year will still be about the virus, but the US presidential elections and Brexit will become key considerations.
- Momentum is still with the bulls and the central banks will provide the insurance policy. Just don’t expect the same kinds of gains as the ones seen between March and June.
There has been an extraordinary rally in global equity and credit markets throughout the second quarter of 2020 – world equity market indices have rebounded by nearly 20%. However, this is unsurprising, given that the sharpest global economic contraction in modern economic times has been met by the leading central banks around the world delivering the biggest monetary and fiscal stimulus package ever seen.
Government bonds have also remained steady throughout the period – but again, this is no surprise, given the buying support created by central banks through their intensified quantitative easing and stimulus packages. The price of gold has also rallied over concerns about when and where the global stimulus programmes will end and the level of global debt that there will be on the balance sheet.
Nevertheless, there was some good news last week from the US: it was announced that a further 4.8 million extra jobs were generated in June, meaning a total two-month gain of 7.5 million. Although this is most definitely positive, the US unemployment rate is still 11.1%.
The easing of lockdown measures in many regions throughout the world should further stimulate the global economic recovery. However, we will also start to see where Covid-19 has created more longer-term damage. As government subsidies begin to be withdrawn and disruptive technologies continue to gain momentum, jobs are likely to be lost through redundancy – particularly in Europe.
While many industries will continue to be badly affected in a post-Covid world, more staff will be needed for online retail delivery services and to ensure that cleaning standards are adhered to. Similarly, breakthroughs in the technology sector should also create many new working opportunities.
Unfortunately, however, the global economic recovery will be slow: the virus has not yet been contained, a vaccine has yet to be developed and a second wave cannot be ruled out. We are already seeing a resurgence of the virus in a number of US states and in other regions throughout the world. Indeed, while an easing of lockdown measures has meant that UK pubs, restaurants, hotels, museums, hairdressers and other businesses have been allowed to reopen (provided they comply with social distancing rules), Leicester has just been subject to the country’s first local lockdown following a spike in Covid-19 cases.
All of this means that while global stock markets may have experienced a “V” shape recovery since late March, the global economy most definitely has not. Businesses, working environments and consumer spending are all undergoing profound change as a result of the pandemic. Under this new modus operandi, the companies that are able to embrace this change will prosper, while those that are less able to adapt are likely to fail and become insolvent. Consequently, the economic recovery will take much longer.
This cultural shift is likely to last for some time and will impact a number of areas of the economy. Throughout the lockdown, companies offering hardware and software enhancements, home-based technologies, online retailers and delivery services have all prospered. Conversely, airlines, commercial real estate, entertainment services such as restaurants, casinos, sports and concert arenas have been decimated, leading to loss of business, furloughing and permanent redundancies.
But the extraordinary measures taken by governments and central banks to combat the global health and economic crisis caused by Covid-19 will continue to support the recovery throughout the rest of this year and beyond.
This will create many new and exciting investment opportunities along the way, although the markets are likely to remain volatile, with periods of heightened anxiety. The rest of this year will obviously continue to be affected by the pandemic as scientists endeavour to develop a vaccine. But a number of other important issues are likely to feature more prominently in people’s minds as the months go by.
November will see the US presidential election, and a recent surge in support for Joe Biden following criticism of President Trump’s handling of the coronavirus and the Black Lives Matter protests is causing a number of people to consider what a Biden presidency would mean for Wall Street.
Some analysts expect higher taxes under Biden – something which would have considerable impact for Wall Street and US corporations. This in itself could herald a turning point for asset allocators, and a possible increase in the appeal of other markets outside the US.
Other Biden policies – such as the US$15 minimum wage – could affect retailers, while his healthcare, technology and clean energy policies could be either supported or scrutinised by voters.
There is also a great deal of speculation regarding his choice of vice president. If we assume that Mr Biden will make good on his pledge to choose a female running mate, then she will become only the third female vice presidential nominee of a major party in US history. He is intending to announce his running candidate on 1 August 2020. This will then set the scene for the election and his campaign will gain further momentum.
The other important issue for the UK is obviously a conclusion to the Brexit saga. The UK and the European Union currently have a number of serious differences which they must overcome if they are to strike a post-Brexit trade deal.
Chief EU negotiator Michel Barnier has indicated that the bloc’s position needs to be better understood and respected by the UK if an agreement is to be reached. Prime Minister Boris Johnson, on the other hand, maintains that a good deal is still possible, but the UK’s sovereignty in areas such as fishing must first be recognised. The UK has ruled out extending the December deadline for reaching a deal.
So, what is the second half of the year likely to bring? Needless to say, the unfolding of the Covid-19 crisis and the resulting consumer and business adaptations will be the main headline drivers for the markets, together with corporate earnings and guidance announcements from businesses. The bulls might suffer from a short-term period of fatigue following the best 11-week rally in market history, which saw the S&P 500 Index gain 38.0% over the period from 23 March to 30 June 2020.
But more specifically, can the stock markets continue to rally, creating a wider bull market in terms of sectors, and one that is less reliant on just technology? To what extent can we expect the growth stocks to continue their leadership rally over value? And is there enough cash on the sidelines to serve as a buffer in the event of a severe pull-back by fuelling a buy-on-the-dips mentality?
Momentum is still with the bulls and the central banks are providing the insurance policy. The second half of the year could therefore turn out to be rewarding for investors – just do not expect gains of the same order of magnitude as the ones seen between March and the end of June.