Market Update – 14th May 2020.

The FTSE-100 has opened lower again this morning after US equities fell following cautious comments from the Fed Chair, Jay Powell.

Jay Powell predicted the unemployment rate won’t peak for another month or two – although he did say it will come back down to earlier levels.  He also said that he believes the economy will recover once the virus is under control, but it may be slightly slower than everyone currently believes, due to potential long-term scarring of the economy caused by business bankruptcies.

Additionally, while he said the US central bank will do everything it can to support a recovery and praised the speed and size of the stimulus from Donald Trump, he believes that additional fiscal support could be “costly, but worth it if it helps avoid long-term economic damage and leaves us with a stronger recovery” – which clearly puts the ball back in Donald Trump’s court.

It wasn’t just Jay Powell sounding cautious, the BoE Governor, Andrew Bailey, also hinted yesterday (13 May 2020) that the UK central bank would soon increase the size of their QE program – which is something that we suggested was likely to happen last week (please see here).

While it is easy to become engulfed in the current negativity, given this week’s equity market weakness coupled with the current bumbling plans to reopen the global economy, we do need to keep in mind that the coronavirus outbreak is a transient issue – and as we have previously stated, although the coronavirus outbreak and associated lockdowns will cause a massive economic downturn, the proactive stimulus efforts from governments and central banks should ensure the downturn is short, with a sharp acceleration on the other side of this horrible coronavirus outbreak.

Having experienced a number of recessions, the current downturn looks and feels very different, as we can all understand and foresee the recovery, whereas in a normal recession we all feel the bleakness of the situation.

That is not to say we are blinkered in our views, as we are closely watching the easing of the lockdown restrictions and as long as any renewed coronavirus outbreaks are mild enough to avoid altering the current rebound mindset into a recession mindset, then equity markets should continue to recover.

Furthermore, while we still believe that we will see a V-shaped recovery and we remain positive on equity markets, we like to invest with clients’ long-term interests in mind by focusing on risk management and capital preservation – and as a result, we currently have a slightly higher than normal level of cash (including liquidity funds) which acts as a hedge if the recovery is a W, U, or even a ‘Nike swoosh’ (like a V-shaped recovery, but slightly slower).

As for today, our attention will be on this afternoon’s US jobless claims data.  While we expect the number of Americans filing for unemployment benefits will remain elevated, we believe the worst has passed and as a result the trend should continue to slow and come in well below last week’s 3.17m.

Investment Management Team