Post holiday blues

With summer fading into memory, a long uncertain winter of social distancing lies ahead. It’s easy to feel gloomy, but as chief investment officer Julian Chillingworth argues, we should try not to buy into the doom.

Not too much has changed since summer, except that its come to a close. At the risk of sounding like a pop psychologist, stock markets are more than simply cold-blooded calculations of companies’ future profits. They are also barometers of a society’s mood. When most of us are feeling upbeat, stock markets tend to follow suit; when people are feeling gloomy, the market stumbles along. 

"The outlook for unemployment will be key to the economic recovery, and what happens in the markets from here."

As financial markets remain tethered to our shared consciousness, the terminal month of summer, September, tends to be the worst month for stock market returns. October is also a particularly volatile time, boasting several major crashes like the Great Crash of 1929 and the lightning strike of 1987. The post-holiday blues afflicts us all, and so it afflicts our social constructs.

Global equity markets lost momentum and suffered their deepest correction since the March tumble with the major US indices, the powerhouse of the global economy, falling after five straight months of gains. There are concerns over the durability of our global economic recovery, plus political uncertainties and worsening COVID news. In Europe, it was good news in Germany as the announcement of its extended job-subsidy scheme led to outperformance, whereas France and Spain underperformed as signs of their second waves hit headlines. Even that age-old safe haven gold had a bad month.

The outlook for unemployment will be key to the economic recovery, and what happens in the markets from here. In the US it is still trending downwards from the 14.7% peak of April. At roughly 8%, it is now broadly the same as in the EU, where the jobless rate is rising. The jobless rate is rising in the UK too, but from a very low level. These figures will be crucial to how fast and how high economies can bounce back because of their effects on consumer confidence and spending.

It’s impossible to determine how this will all shake out. There’s simply too much in flux. Statistics have been warped by the lockdown period and the tremendous shift in what people are buying and how. Fewer companies than ever are offering forward guidance today – a reasonable decision in our view, given the difficulties just mentioned. All of this can be bewildering and not a little scary. But the speed of these changes is actually one of our greatest strengths. For all the flaws of our time, we are one of the most dynamic societies that has ever lived. Our technology, our culture, our institutions, all of them have given us the flexibility needed to completely recode how we live and work in the space of months. It hasn’t been perfect, but it worked. And despite appearances, we continue to adapt rapidly every day.

"But try not to buy into the doom too much. Try to keep perspective, remembering the good as well as being mindful of the bad."

This note started by saying nothing had really changed since August. And that’s true. Everyone was aware that COVID-19 wasn’t going away anytime soon. If investors were worried about these risks, they should have already factored them into share prices months ago. But that’s not the way we work. When the sun is shining and the waves lap sand just beyond our paperback, we tend to shrug these things off. But when the weather shortens the horizon and the chill creeps in, we start to focus on the negatives. We’re all human at the end of the day.

But try not to buy into the doom too much. Try to keep perspective, remembering the good as well as being mindful of the bad. Here in the UK, the infection rate has surged in recent weeks, leading the government to consider yet more nationwide restrictions and localised lockdowns. Yet hospitalisations and deaths haven’t followed suit. Hopefully the rapid progress in treating the disease means they never will, although we won’t know for sure until a few more weeks have passed. Meanwhile, most schools and businesses have reopened. This is of course a double-edged sword: more commerce and classes mean more chances for infection. Yet we have to get our kids back in school otherwise we risk scarring their development and mental health for years. And we must learn how to run our economy safely in this environment to retain our quality of life. Almost a third of Brits think life will take more than a year to get back to how it was before the pandemic (some think it will never happen), and they are likely not wrong. The loss of skills from a year or more out of work would be debilitating for the people left unemployed and the country as well.

For our part, we’re steeled for a bumpy road. The unfettered conditions for roaring economic growth are the same as for a large resurgence in the pandemic. To restrain the latter and partially enable the former a compromise appears to have been struck. This won’t mean cataclysm, but it won’t be an easy bounce back either.

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