14 Jun 2020
They say a week is a long time in politics and the same can be said for financial markets. On Friday 5th June, the US announced the change in payroll figures, which appeared to show a sharp rebound in job creation from the previous month. These figures were somewhat distorted as miscalculation errors were included where some people were classified as employed rather than unemployed. However, even with these miscalculations factored in, the numbers were nowhere near as bad as what was widely anticipated. The subsequent weekly jobless claims numbers appeared to support that the economy was slowly firing back up as workers returned to their jobs and stimulus measures started to flow through.
Does this mean that things are slowly getting back to normal? The equity markets would lead us to believe this as they have continued to claw back from the lows witnessed in March with the Nasdaq reaching an all-time high as technology, an area that has benefited from the global lockdown, continued to attract investors.
However, fast forward to the Fed meeting on the 10th June, where an element of caution was reintroduced as the Fed maintained that ‘considerable risks’ to the economic outlook over the medium term still exist. They were signalling that a V-shaped recovery was not going to be the expected outcome with it taking until 2022 for GDP to return to pre-crisis levels.
The 11th June saw equity markets retrace due to concerns over the increase in cases of Covid-19 in some parts of the US that had emerged from lockdown. It could be argued that the markets had started to decouple from the economy with the rises previously seen and an element of reality was starting to come back into the market.
These concerns raised the prospect of a second wave of the pandemic in the US with Treasury Secretary Steven Mnuchin confirming that, in the event of a second wave, shutting down the economy was not a viable option. This highlights that, although we have made progress, there are still levels of uncertainty as economies emerge from lockdown and we are not at the end of this crisis.
Turning to the UK, Friday 12th saw the announcement of the April GDP figure with an unprecedented decline of 20.4% and the three months to April declining by 10.4%. This announcement provides sobering reading concerning the impact of lockdown on the UK economy. Record monthly falls were seen across services, production, manufacturing and construction. For manufacturing, it isn’t surprising that the production of pharmaceutical products was the only positive contributor.
Naturally, the second quarter GDP figures will be anticipated in earnest to see the true consequence of lockdown. As we emerge, and measures are eased to allow more economic activity to take place, the rate of infection will need to be closely monitored to determine whether measures need to be tightened or if further loosening can take place.
Although the lockdown has started to ease on a global scale, it will take time to see this feed through to the wider global economy and ultimately to understand which businesses have survived. A close eye is required on the data over the coming months to understand where the global economy has contracted and what the road to recovery will look like.
Due to this, reiterating an important point previously made, a key strength of our client portfolios is diversification, not just in terms of asset class, but also with regards to geography and investment styles. Although the selloff in March was indiscriminate, the recovery from this crisis will not be, and the diversified exposure should assist portfolios to meet long term client objectives.
Stuart Ryan, Investment Research Manager, RSMR
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This information is for UK Professional Advisers only and should not be given to retail clients.The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.
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