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Monthly Market Commentary - March 2020

Over the last two months the mood in the market has shifted from complacency to denial, then to despair followed by hope.

Illustrative image of chart

Jon Cunliffe

in Fiduciary news


Over the last two months the mood in the market has shifted from complacency to denial, then to despair followed by hope. We had previously highlighted that January’s high equity valuations – alongside bullish growth forecasts and optimistic earnings estimates – made the stock market potentially vulnerable to an exogenous shock.

This complacency was replaced by denial when the COVID-19 virus began to spread across the globe, with market participants initially seeming to shrug off the news. However, the authorities’ response was to supress the virus’s spread by dramatically curtailing the free movement of people. As a result, large numbers of companies are losing a significant amount of business. Many have had to shut down altogether, causing many jobs to be lost. It took the market arguably too long to work out the extent to which revenues and profits will be hit and how far consumer spending could fall.

However, when the penny finally dropped in early March, we saw markets gripped by despair, with the most rapid and deep equity market correction seen since the great depression. Left unchecked, the economic and financial market developments of the previous two weeks would have rapidly pushed the global economy towards the precipice.

However, the response from the world’s key fiscal and monetary authorities has been swifter and larger than that seen in the 2008 global financial crisis – and it has had to be, given that economic activity was in danger of coming to an abrupt halt. Financial markets, more broadly, were ceasing to function properly.

Over the last two weeks, hope has returned as equity markets recovered some of the heavy losses sustained during the first half of the month. The US administration has successfully passed an impressive $2.2trn fiscal stimulus package and the US central bank, the Federal Reserve (Fed), increased its commitment to support the market by stating that it will purchase as many US government bonds as would be necessary to support the US economy and restore the proper functioning of financial markets.

Elsewhere, the Fed has also taken steps to increase the supply of US Dollars to overseas central banks in order to ease funding pressures experienced by borrowers in the world’s reserve currency and has intervened in the US corporate bond market for the first time. Outside of the US, we have seen a substantial easing of fiscal policy in most major economies (including the UK) augmented by easier policy rates and quantitative easing (purchases of bonds).

However, we are about to enter the most rapid and deep global recession seen since the Second World War. As a result of governments’ actions to prevent the spread of COVID-19 large swathes of the global economy are in shut down mode and corporate revenues in many sectors have collapsed. We are only beginning to see data on economic activity, corporate profits and dividends and the worst is likely to be several weeks, if not months, ahead of us.

Against this background it is too early to call an end to the financial market stress and volatility which we have witnessed since late February. Aside from the need for positive news flow on COVID-19, we feel that more of the impact on the corporate sector needs to be socialised with investors before the equity markets can begin to build a firm base from which they can stage a meaningful recovery. As a result, we feel it is now appropriate to be somewhat cautious in the near term.

However, as we look further ahead, optimists would highlight that financial markets are adept at discounting the future. As a rule, equity markets tend to find a firm footing roughly one quarter before the end of a recession and we are working hard to gauge the length as well as the depth of this current economic downturn to give us the signal to buy, which will inevitably come.

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