April saw stock markets stage a signiﬁcant comeback from the lows of March. The FTSE rose 5.5%, the DAX 9.3% and the French and Italian bourses around 3.7%. However, it was the numbers in the US which were quite startling. The Dow Jones was up by 11.4% in its best month since June 2000 and the S+P 500 was up by an incredible 12.7%, its best month since 1987. There was a sharp sell oﬀ on the last day of the month, which lowered the monthly returns, but last Wednesday (29th April) the FTSE closed at 6115, something that seemed extremely unlikely a little over a month earlier on 23rd March, when the index hit a low of 4993. The question is what caused this bounce back and is it sustainable ? Furthermore, can this be considered any indication of how the broader economy will emerge from the COVID crisis ?
There seems to be several factors that have driven markets higher. Firstly Governments around the world responded quickly to the pandemic and on an unprecedented scale, far outgunning the support oﬀered during the Great Financial Crisis of 2008 onwards. This degree of assistance led to market optimism that the authorities had a handle on the situation and would do use all available measures to try limit economic damage. As with the support given during the GFC this intervention has tended to ﬂow towards assets and is supportive of prices.
A second factor, which is particularly relevant to US markets, is that President Trump is very keen to end the lockdown as rapidly as possible, seemingly intent on a far less measured return to normality. This is despite the fact that the US has suﬀered the most deaths from the virus of any nation. While it is clearly possible to argue with the ethical nature and timing of this decision, with more than a suspicion that the impending US election may be playing too large a part, it is also true that the earlier an economy restarts, the sooner the recovery process will happen. While this theory excludes the damage of a second wave of infection that may be caused by relaxation of lockdown too soon, it seems US markets in particular are taking this as a positive signal. Some commentators are still bullish about the chances of a relatively sharp, V shaped recovery (although most now seem to be more inclined to hope for “a narrow U shape) and an earlier restart to the economy would likely encourage this.
A further potential inﬂuence is that as the selloﬀ was both sharp and all encompassing, a large number of stocks have been oversold, resulting in a lot of bargain hunters looking for underpriced assets. This, together with the classic “ fear of missing out” has attracted buyers in the belief that this might prove to be a once in a cycle buying opportunity. To urge caution in this respect, while it is very true that the fall left very few sectors untouched, it could be argued that the disruption has just exaggerated existing structural trends and that there were a large number of companies/sectors that were previously overpriced and are now closer to their true value. In a reversal of the March sell oﬀ, the adage that a rising tide lifts all boats might well be seen in action and not all bargains will be as meets the eye. There will certainly be opportunities to buy quality assets at a signiﬁcant discount to their price in January, but these will likely be speciﬁc, well run companies in non cyclical sectors. As an aside, one would normally expect “value” stocks (or companies out of favour with the market) to do well in a bear market, at the expense of “growth” companies (those that have predictable future earning capacity). This rotation has not happened and value remains very much out of fashion.
The question is, are the above factors suﬃcient to justify the rise in markets we saw in April ? Remember the month also saw some quite disastrous economic numbers, with huge falls in GDP and rises in unemployment across the globe. Furthermore, there is no sign of the much awaited news concerning either herd immunity or a potential vaccine, neither is data yet available on infection rates on those countries that have begun to ease restrictions. Without the positive news we are all hoping to hear, the strength of the rally is perhaps surprising.
There are exceptions and it is clear why some markets will have jumped. The S+P 500, for example, is heavily weighted to technology companies, many of which oﬀer products such as video conferencing, that have risen in popularity in this crisis. Looking forward it seems likely that some of the changes we are seeing in business practice are irreversible, giving a positive outlook to the tech companies that provide these services. Together with the over selling of such stocks in March, the rise here would seem justiﬁed, but in the broader market the case is less clear.
The main stream media, certainly in the UK, is taking a very diﬀerent view to that of the markets, steadfastly refusing to display even the slightest suggestion of optimism and generally delivering a bleak picture of the post COVID landscape. There is therefore a vast diﬀerence in outlook between what we are being told by the media and the reaction of the markets at this time, and one of them will be wrong, perhaps even both will be. In most circumstances I would take the view of money men over the that of the media, believing that their vested interests are very diﬀerent. Markets want to make money and are forward looking while the media seems ﬁrmly to believe that bad news sells. I hope that the positivity shown by markets proves to be correct and economies do return to some degree of normality in the not too distant future, albeit with a colossal amount of fresh debt to repay. However, I suspect that the truth will probably fall somewhere between the two, diﬀering view points.
Author Trevor Hubner