March madness

Markets are jig-jagging like a frightened hare as wholesale lockdowns and extraordinary stimulus have streaked across the globe. Our chief investment officer Julian Chillingworth reports on the month.

The spread of the COVID-19 pandemic across the world has been matched by truly enormous support packages from central banks and governments.

The US, Europe and UK in particular have rolled out trillions of dollars of furlough schemes, bargain loans, grants, bolstered unemployment benefits and the obligatory quantitative easing (QE). This is a welcome response to a global health emergency, and a much more timely reaction than during the credit crunch a decade ago. But now we’re into the crucial bit: execution.

The UK has staked everything on its furlough scheme, yet the ranks of unemployed are rising fast anyhow. The Universal Credit system takes five weeks to pay out in normal times. And even with the COVID-19 supplement, the benefit covers just 20% of the £30,000 median annual wage. Families with more than £16,000 in savings are ineligible for any aid, those with more than £6,000 get their payments docked. American unemployment benefits are much more generous, especially so after the pandemic boost. The average unemployment insurance benefit is actually higher than the median full-time wage. Early reports say US states have been overwhelmed by the millions of people attempting to sign up for the dole. Yet millions of payments have been made. You can write all the cheques you want, but they’re worth nothing if you can’t send them out quick enough.

This is an unprecedented situation for governments and it has been met with an unprecedented response. This gives us both cautious hope and sceptical misgivings in equal measure.

The hare-like speed of the virus’s spread and the unprecedented economic lockdowns and policy support have sent markets on a crazy run. The three months to 31 March was the worst quarter since 1987, with the FTSE All-Share falling 25% and the S&P 500 dropping 20% (in dollars). Markets rallied sharply in April, roughly halving their losses since the initial sell-off. Yet oil remains fragile.

Petrol prices fell off a cliff in the first quarter as businesses shut up shop and households stayed at home. This led OPEC, Russia and the US to try to agree reductions in the pumping of crude oil, putatively to buoy prices. But the real issue was that the world was heading into a storage crisis. A consignment of oil isn’t a bag of peanuts. It’s messy, toxic and extremely flammable. To store crude oil you need huge tankers and drums and bowsers. And you need to pay someone to watch it and make sure it doesn’t leak or blow up (plausibly, someone may try to steal it too, but who would they sell it to right now?). This all costs money, and when there’s virtually zero storage space left that costs a lot of money. That’s why the American crude oil future for delivery in May went negative for the first time ever; it went as low as -$37.63 a barrel. That future is a contract that obliges the person who owns it to receive 1,000 barrels of crude oil in one month’s time. In English, that’s a contract to receive a really big headache, which is why the future price went negative: owners of oil are paying people to take the problem off their hands.

This doesn’t mean that oil is doomed or that no-one will ever drive again. It’s simply what happens when the world stops but the oil pumps don’t. Our world runs on carbon – and will do for many years yet. What it does highlight is that the oil industry must become more flexible, both in its technology and its business strategy.

  Index

1 month

3 months

6 months

1 year

FTSE All-Share

-15.1%

-25.1%

-22.0%

-18.5%

FTSE 100

-13.4%

-23.8%

-21.8%

-18.4%

FTSE 250

-21.7%

-30.7%

-23.5%

-18.6%

FTSE SmallCap

-20.7%

-27.9%

-21.0%

-19.4%

S&P 500

-9.8%

-14.2%

-13.1%

-2.8%

Euro Stoxx

-14.5%

-21.3%

-20.6%

-12.4%

Topix

-3.4%

-12.0%

-11.0%

-2.9%

Shanghai SE

-3.1%

-5.4%

-5.3%

-11.4%

FTSE Emerging

-13.9%

-19.0%

-15.8%

-13.4%

Source: FE Analytics, data sterling total return to 31 March
 

Peak sadness

Stock markets have done exceedingly well over the past few weeks, yet the news has been terrible.

Since late March the MSCI World equity index has recovered about 25%, with US companies leading the charge. It’s that old chestnut: “the global economy is crippled, 22 million Americans are unemployed and the S&P 500 has one of its best days ever.” Aren’t we in the greatest economic peril in several generations? What’s going on?

On the face of it, this sounds like investors cheering misery. In reality, the reason for this uncomfortable juxtaposition is investors are focused on the horizon and it tends to look brightest right when the night is at its inkiest. Such a sharp whiplash in fortunes is disorientating. In short, a lot is churning in the markets right now.

Many investors have borrowed to invest and are desperate to sell to repay debts and avoid bankruptcy. Others are conditioned to buy on market falls because it has always borne out gains for them over six months to a year. There are a lot of investors on the sidelines with a whole bag of cash waiting for a ‘good time’ to jump in and make a killing. And then there are some investors who are desperate to buy stocks at any price because they have ‘shorted’ them (borrowed stock from other investors and immediately sold it, hoping that the price would continue to fall). With stocks jumping higher, these investors have to buy shares to return to the investors they borrowed them from and each tick higher increases their losses. Yep, markets are messy places when you get right into the weeds. Single narratives, while sometimes useful for context, are rarely completely accurate. Especially in times like this.

At the moment, most everyone has a theory about the shape and trajectory of the economic recovery and the path of markets. It will be ‘V-shaped’ or ‘U-shaped’, more of a ‘W’ or a ‘downward-sloped square root sign’. Everyone has particular statistics they are watching for their own milestones of the pandemic, the end of lockdowns and a recovery of commerce. We certainly do. Most people are adamant their tools and predictions are the right ones. We’re not so sure. We’ve never lived through a pandemic like this before. We’ve never seen governments shutter whole nations overnight and then unleash a flood of money to try to alleviate as much of the pain as possible. We have put a lot of thought and mathematical science into our strategy and our research, but we’re trying to ensure that doesn’t push us into foolish overconfidence.

When markets recover sharply, yet briefly, in the midst of dramatic fall, old traders would call it a ‘dead cat bounce’ (because anything that falls from high enough will bounce). Nowadays it has a more benign sounding (yet more impenetrable) moniker: a ‘bear market rally’. So is that what’s happening here? Only time will tell. Asian nations are slowly getting back to work, the European outbreak appears to be sliding down from its peak – Germany, Norway, Poland and the Czechs relax their lockdowns this week – and even the US seems to be improving. It seems that many investors are focused on determining the worldwide crescendo of the virus because they believe that will be the point of ‘peak sadness’ for all of us, both socially and economically.

That is not altogether assured, however. The economic effects of this slowdown are continuing to ripple throughout the world, with knock-on effects still to come. It is still very early days in this crisis. Many hard-up families and businesses are yet to see the first cheques promised by their government and even more won’t have yet received second demand notices for unpaid bills, the final ones will be a few months away yet. We won’t know the point of peak pain until we’re well past it.

 

Bond yields

Sovereign 10-year

Mar 31

Feb 29

UK

0.36%

0.44%

US

0.67%

1.15%

Germany

-0.48%

-0.61%

Italy

1.53%

1.10%

Japan

0.00%

-0.16%

Source: Bloomberg

Total votes: 112

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