Are We Coming Back From The Abyss?
With the death rates from Covid decreasing and countries beginning to end their lockdowns how are things looking for market recovery?
Despite an increase in the number of new cases in the U.S., we are still seeing the beginnings of economic growth as the country reopens and adjusts to life with COVID-19 as a “normal” part of every day life.
After a brutal March wrecked an 11-year bull market, there seems be little doubt that equity markets in the U.S. are returning to bullish form after being rocked by COVID-19.
That at least applies to recent gains for the Nasdaq Composite Index, which is on the brink of topping its Feb. 19 all-time closing high.
As of Wednesday afternoon, the Nasdaq COMP, -2.59% was about 1.4% from its February all-time high at 9,817.18. On top of that, a bullish ‘golden cross’ has formed in the index, where the 50-day moving average rises above the longer-term 200-day line, with this relatively rare event marking the point where a shorter-term rebound morphs into a longer-term uptrend, according to chart watchers.
The Nasdaq had marked the fastest entry to a bear market, defined as a decline of at least 20% from a recent peak, on record, spanning 16 trading sessions, according to Dow Jones Market Data. Now, the Nasdaq in its 73rd day from its previous high, is on pace for its second-fastest recovery after entering a bear market since March 2009.
To be sure, gains in technology have been concentrated in a handful of names, including so-called FAANG names, like Facebook FB, -8.31%, Amazon.com Inc. AMZN, -2.24%, Apple Inc. AAPL, -3.07% Netflix NFLX, -4.83% and Google parent Alphabet GOOGL, -5.45% GOOG, -5.65%, which have been seen as more resilient, and even benefiting from, to stay-at-home orders that had been in place to curb the deadly contagion.
The rise in those large-capitalisation stocks have helped push the market higher.
Apple is predicting a growth in sales later this year as people are using their phones much more during the lockdown as well as saving money due to many of their usual activities such as going to restaurants and cafes etc being closed. They are expecting a large volumes of sales of the incoming iPhone 12 in autumn 2020 as direct result of this.
However, the broader stock market has begun to experience a more diverse rally outside of tech-related names, with the Dow Jones Industrial Average DJIA, -2.83% trading 12% from its Feb. 12 closing high at 29,551.42 and the broader-based S&P 500 index SPX, -2.42% which was less than 8% from its recent peak at 3,386.15.
Gains for the market have come despite some concerns that the recovery from the business closures and layoffs won’t result in a so-called V-shaped, or quick recovery, from an economy that has fallen into recession.
Markets also have managed to ignore rising tensions between China and the U.S., and national protests, alongside riots and looting, sparked by the death of an unarmed black man in Minneapolis under the knee of a white police officer.
Some experts have attributed the resurgence in the stock market to the unprecedented amounts of stimulus provided by the Federal Reserve to help prop up the economy and the financial markets, with the central bank’s balance sheet exceeding $7 trillion, as of last week.
However back across the pond here in Europe it appears the economies risks losing out on a massive dose of stimulus from its consumers.
Households have stashed away hundreds of billions of euros in their bank accounts under lockdown. And even though shops in many countries have reopened, surveys show little sign that people are ready to splurge just yet amid spiralling unemployment and the threat of a second wave of infections.
That raises the risk that Europe’s recovery will be anaemic, with underwhelming impetus from domestic demand.
“Some of the latest savings are going to be spent, and we are already seeing some pockets of it,” said Gilles Moec, chief economist at AXA in London, citing a strong recovery in restaurant bookings in countries such as Germany.
Consumer Spending Down
Consumer spending, which accounts for more than half of the European economy, is crucial for the recovery. It was responsible for some two thirds of the first-quarter contraction.
France, Italy and Spain, where the coronavirus has claimed more than 90,000 lives, have seen steep increases in the annual growth rate of household deposits. Germany, which was more successful in containing the disease, didn’t see any unusual spikes.
Economic recovery normally lags behind market recovery after substantial bear downturn and this will be no different and remember these famous words by Baron Rothschild “buy when there’s blood in the streets” and you can read more about this principle HERE
To sum up the key take aways are:
– U.S & Global Economic Numbers will Continue to Improve
– Media / People lose interest in COVID-19 more quickly than you think – goldfish effect
– It becomes the new normal
– There is genuine belief that the market can go further. It would be unwise to ignore this
– S&P 500 Market Cap. Weightings FAANG heavy
– Lockdowns are ending Globally
The human race is nothing but resilient and during the toughest of times must maintain a positive approach towards life.
The markets will recover as they have down in the past and economies will grow once again.
If you are worried about your current portfolio holdings during this time or would like more information on possible investment opportunities you can take advantage of my free 60-minute consultation by clicking Contact Me Today for an initial informal chat.
I would be happy to review your current financial plan, offer some tips for creating one or answer any questions you might have pertaining to your investments.
About the author
Colin MacGregor is an independent financial advisor with over 10 years experience in the advisory sector and has been based in Prague, Czech Republic since 2009.