Few of us will forget the first half of 2020, which has been dominated by one of the worst pandemics ever witnessed.
Unfortunately, so far the virus has claimed more than half a million lives and infected millions more.
As countries begin to emerge from lockdown, it is clear that much of what we have seen so far could be repeated again in the second half, and only a vaccine will bring true peace of mind.
Markets are a leading indicator of sentiment and therefore the extreme price movements we have seen this year in response to the outbreak speak for themselves.
Trying to judge prices and outlooks has become nigh on impossible across many industries where there simply isn’t any data to turn to, as shops and offices have been closed.
Nonetheless, the response from central banks and governments has seen many indices rebound sharply.
The FTSE 100 shed more than a third of its value as COVID hit, but has rallied back somewhat to sit around 19% lower year-to-date. Meanwhile the S&P 500 – which also suffered a steep tumble – has rallied so sharply that it sits just 5% off its starting level for the year.
Ascertaining where we go from here is far from straight forward, but there are some areas we can turn to which give us something of a guide.
“Data has been unprecedently bad in 2020,” says Daniel Casali, chief investment strategist at Smith & Williamson Investment Management. “However, economists are confident of a recovery in 2021 with consensus suggesting a recovery for real GDP.”
Casali says that is why markets have recovered, with investors’ faith in an economic re-emergence from lockdowns clear to see.
The past data from recessions – albeit different in nature to this one – is showing signs of being mimicked in this downturn, he says.
“Over the last seven recessions, equities have troughed 2.7 months before the recession ended. We believe this to be happening now, with the current market bottom, 23rd March, being 2.9 months ago,” Casali says.
“The strong rebound by global equity markets has basis, both historically and from high frequency data. It is supported by economic forecasts and discounts a global recovery, and we are beginning to see this recovery manifesting itself through a variety of indicators.
“Of course, winners and losers will appear and the risk of economic activity taking a while to return to pre-COVID levels remains. Nevertheless, if economies can avoid nationwide lockdowns again, we remain confident in the economic recovery.”
John Husselbee, head of multi-asset at Liontrust Asset Management, thinks caution should remain the watchword for investors trying to pick their way through this environment, although he thinks the depths of this downturn may not be revisited.
“We believe markets are running substantially in advance of fundamentals and this disconnect had tempered our desire to increase risk for our portfolios. Markets and investors are failing to weigh the positives and negatives of current conditions dispassionately, with policy easing and liquidity injections seen as far more important than ongoing uncertainty, and, for us, that has to call the longevity of the rally into question.
“But we would not expect another collapse as happened in March given the level of state intervention and ‘whatever it takes’ attitude.
Vincent McEntegart, investment manager at Kames Capital, agrees that the rebound so far should not be interpreted as “normal service will resume shortly”.
“Clearly it won’t,” he says. “Market indices are instead reflecting the scale of liquidity that central banks have provided to keep markets functioning.”
McEntegart says the next headwind for markets to contend with will be GDP growth for Q2 which will “be the worst we’ve seen in our lifetimes.”
“Unemployment numbers also look set to rise as governments scale back the furlough schemes that are providing life support for millions,” he adds.
As for a “second wave”, McEntegart says here the news is a little better, as it is currently assumed to slow the recovery but not derail it completely.
Nonetheless, he warns there remain other big unknowns from both the ongoing trade war between China and the US, and the US Presidential Election.
“As well as the risk of a second wave, the US election in November might be preceded by increased trade war risks and/or further stimulus to improve Republican chances of winning.
“As we wave goodbye to the first half of 2020, let’s hope we never see its like again.”