The Covid 19 Pandemic is a human, social and economic crisis which has affected everyone everywhere. At the start of the pandemic in 2020, the Financial Markets were turned upside down following the global lockdown which triggered a surge in unemployment and a deep recession.
In March, we witnessed the fastest sell off in equity markets ever recorded. Both the UK FTSE 100 and US Dow Jones plunged by over 30% as the Year to Date (“YTD”) graph below shows.
US Dow Jones ________ and FTSE 100 ___________
Yet since this time, world equity indices have staged a dramatic recovery which has broadly held its position to date despite a poor economic backdrop. In June the IMF projected global growth at – 4.9% in 2020.
A significant factor supporting this "V-shaped" recovery in financial markets is the response from central banks and governments and the huge fiscal and monetary stimulus packages that have been rolled out. Interest rates have been cut, government bonds have been bought up in large amounts, businesses and individuals have been provided with significant financial support. Together these measures have helped support equity stock prices by boosting liquidity, lowering the cost of borrowing and raising business confidence.
In addition, stock market values not only reflect what is happening now but are forward-looking given that they represent the present value of all future earnings. When the market crashed in the first quarter of 2020 a lot of bad news was priced in at that time. However, as governments are easing lockdowns and gradually opening up the economy, markets are now looking at expectations for future years earnings particularly 2021 and 2022. Therefore, stock prices which capture both the near-term negative outlook, but also a subsequent recovery have pulled back as a result. Of course, the shape of that recovery continues to be a subject of much debate especially as concerns remain about a second wave of infection and the adverse effect on businesses ability to cope with debt for longer. Central bank and government support may have eased fears over some of the worst-case scenarios but significant uncertainty continues and the markets remain vulnerable to further shocks.
Another factor explaining the recovery of equity markets is the impact of tech companies which account for a significant percentage (particularly in the US) of the stock market index e.g - Microsoft, Amazon, Apple, Google and Facebook – have outperformed the general market as a result of a growth in on-line orders particularly during the pandemic. They also represent approx. 4% of the S&P index. This has also helped to partly explain why UK equities have fallen faster and harder than their counterparts across the G7 and have been slower to recover.
The FTSE 100 includes many cyclical businesses in sectors that have been economically sensitive to the lockdown , such as those in the energy, financial services industries and property. The graph below of US stock Amazon versus FTSE 100 Stock Lloyds Bank shows that there have been clear winners and losers emerging from this pandemic depending on the sector. Another factor weighing on the FTSE which has resurfaced more recently is, of course, Brexit and concerns about a no-deal.
Amazon vs Lloyds Bank Share price performance YTD 2020 (Source CNN)
Figure 1 Amazon __________ Lloyds Bank ___________
As the markets adjust to this uncertain and evolving economic environment, we can expect volatility to feature for some time.
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Past performance is not a guide to future performance. The value of investments and any income derived from them can go down as well as up and you may not get back the amount originally invested. This blog is not intended to be, nor constitutes Advice whether legal, financial, or other advice.