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Towards the end of April 2020, some market commentators were beginning to speak of a return to “bull territory” in the UK markets. In other words, voices are claiming that the huge market fall during the nationwide COVID-19 lockdown is starting to correct itself, and stock prices are even starting to climb again. As a result, some investors (and pensioners) are starting to feel more optimistic about their portfolios.
At Cedar House, this momentary stability has led some to ask our financial advisers where this means May 2020 is a good time to change investment strategy. Should “cautious” investors take this as a sign to start moving more of their liquid assets into stocks? Can those with a more “aggressive” approach breathe a sigh of relief and commit even more towards equities, perhaps abandoning diversification across asset classes altogether?
Our thoughts (and answers to some of these questions) at this stage are reflected below. Do note that no financial adviser can predict the future, but it is possible to draw educated insights about the present state of the market(s) to help inform investor decision-making.
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Are markets recovering in May 2020?
After a brutal first quarter in 2020, most investors in May are gasping for a reprieve from the market turmoil and downward trajectory which has eroded the value of even highly “cautious” portfolios (e.g. those heavily weighed towards fixed-income securities, such as UK government bonds). The U.S. economy, for instance, shrank by 4.8% in this period; its worst contraction since the 2008-9 financial crisis. As the country which makes up about half of global market capitalisation, countless companies, sectors and their investors were hit also. The Dow Jones, comprising the average of the leading 30 blue-chip U.S. stocks in their industries, plunged 2,999 points in just one single day; March the 16th. Similar drops of leading indexes were also seen in the UK, mainland Europe and Asia.
Recent reports in May, however, suggest that markets might be entering “bull territory”. This often happens when a stock market rises at least 20% from its most recent “trough” (i.e. lowest point). By the 29th of April, for example, the FTSE 100 had risen 20.4% from the 4,994 shown at the end on play on the 23rd of March. As a result, some investors are speculating that the “worst is over” regarding the recent COVID-19 bear market, and people can start breathing a sigh of relief. However, is that really the case? What is really going on in the markets?
What explains the recent market behaviour?
Once again, our financial advisers here at Cedar House need to stress that the market is very complex, influenced each moment by countless forces and factors which can’t be fully identified or understood even the finest investor minds. However, from what we can tell at this stage, it would seem premature for anyone to be speaking of imminent economic recovery in May 2020. It’s a possibility, of course, but undeniably unlikely.
In the UK, noises are being made by the government about a possible easing of the lockdown measures in coming months. Primary school children may return to school in June, for instance, and draft rules are being laid out for workplaces in the UK to start bringing people back into their offices. Nonetheless, many industries are still suffering from lost revenue and “pre-COVID-19” consumer behaviour is unlikely to return any time soon. Clothing retailer Next, for example, has reported a 52% loss in revenue from its physical branches in the 13 weeks preceding the 25th of April. With aviation, it is still uncertain how the industry will change in the foreseeable future. European airlines are already projected to lose £63bn o 2020 due to falling passenger numbers caused by pandemic lockdowns.
It’s important for investors to bear the long-term view in mind when considering recent market behaviour. Whilst it is reasonable to be encouraged by a 20%+ rise in the FTSE 100, on the 29th of April the index still remained 23% lower than May 2018 (its record high) and 22% lower than its position in mid-January 2020. Explanations abound about why money is starting to pour back into the UK stock market, but much of it seems due to optimism about a near-term easing of lockdown restrictions.
This, of course, is highly speculative. The possibility of another COVID-19 “wave” is still very much on the cards, which could cause a rapid change in UK government lockdown policy to try and counteract it. For businesses currently on their knees, we certainly hope this turns out not to be the case. Yet investors should be wary of getting too optimistic at this stage. Speak to your financial adviser if you are at all concerned, or if you are considering a change in your investment strategy. Remember that successful investing is focused on the long-term goal, not short-term tactics which try to “time the market”.
If you would like to discuss your financial plan or investment strategy with a member of our team, then get in touch today to arrange a free consultation:
020 8366 4400 or email@example.com.