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Wobbles, Roly-Polies, and Somersaults – An Update on Mischievous Markets

Students of behavioural finance will note that we have lived through seemingly-irrational market conditions since 2017. Lord pity the poor wealth management grunts who had to abandon their families and leap back to offices on Boxing Day 2018 to pen the dreaded “your portfolio has dropped by >X%; we are therefore in breach” letters only to see those losses recouped in Harlem-shuffle-style fashion a mere smattering of months later. An almost inexplicable rush’n’run kicked off this year, all the while the West lying ignorant of what was truly unfolding (or not, in the case of that bat’s wings) away to the East, and the prospect of economic collapse and market turmoil would have been nigh unfathomable. Yet, markets seem to have decoupled from economic reality and apparently a dead cat really can bounce, but could it so do a second or even third time?

Confidence is an almighty bellwether and an ostrich with its head in the sand a happy camper. To take a total red herring of an example, the price of puppies. Yes, that’s right, folks. A state of lockdown makes us go bananas and bake them too. The highs and lows of this turbulent period are all too indicative of the human condition and if we look at the little balls of furry joy trading hands, in dodgy car parks stealthily reached by necessarily-circuitous routes, at 75-100% premia to owners who may desperately be calling neighbours and relatives once a greater degree of ‘normality’ is upon us, we might possibly, tangentially understand something of market behaviour in the last few weeks and beyond. And yes, for the record, I too have succumbed to puppy fever and the delightful little beastie sits now on my lap, occasionally outstretching a paw of protest onto my keyboard, but I firmly believe I got her at a fair price.

Right, now for the serious stuff.

With many equity portfolios having somewhat bewilderingly recovered lockdown losses in such a short space of time, consensus having been by end of year or end of Q1 2021, a mid-month retreat, most notably by US, European, and UK markets, should have come as no surprise. Whilst European and UK markets have had something of a shocker this past year, they have enjoyed an uptick, jitters aside, this month. There is no doubt that the US has been the place to be, however, and who would have thought that the traditionally more volatile NASDAQ would be a defensive portfolio positioning. The US’s recent bouncy ball (within the dead cat) moment came on the back of the Federal Reserve’s latest stimulus plans: the purchase of corporate bonds.

The chug of the steamroller-paced-and-pounded rally continues on, but with R-numbers ticking back up in newly reopening countries, notably Germany, a second wave, concomitant lockdown, and its market-jangling effects dare not lightly apprehended be. For those saying, look at New Zealand, I say to you OK fair enough – almighty impressive to have recorded no new, locally-acquired cases since May the 22nd, but also rather nifty to be islands well adrift and a small, well-regimented population. For rugby fans out there, check out Super Rugby Aotearoa highlights on YouTube – stadia packed with fans and no social distancing required.

More on the perils of easing, however, and especially from the US where twenty-one states (out of fifty) are seeing case numbers on the rise. A leaked memo from the EU yesterday indicated that whilst it plans to reopen borders from July the 1st, travellers originating or ordinarily resident in the US would not be permitted entry on the grounds that the country has so poorly handled the crisis. The President himself, to add to the hearty litany, in answer to questions over rising case numbers said that if there were fewer tests there would be fewer cases. Accordingly, he had asked for testing to be slowed down, the unfortunate consequence of which, whether it had crossed his mind or not, that a greater number of people would not know they in fact had the virus and therefore pose a greater contamination risk. The numbers are rising to the extent that, to take Austin, Texas, as one example, shelter-in-place orders may soon be reinstated. This is in a state where the number of people hospitalised in the middle week of June had risen by 45% (and Texas is by no means alone in this – a good many ‘red’ states keen to boost the President’s re-election chances have seen similar spikes). China imposed travel restrictions on Beijing residents on fears of a fresh outbreak. The recent protests witnessed in a host of nations, the focus of which, at least in the West, has been over racial injustice, as well as Chinese reports that the virus may have mutated into a more contagious strain, may well have catalysed an upwards wiggle in infections. Delays to liftings and risks of reinstatements will raise the heckles of markets the world over. Judicious resistance to increasing of portfolio equity allocations seems the most prudent tack. 

Reasons for caution

  • Number of valuations where Price-to-Earnings (PE) ratios look overblown
  • Dramatic swing in options market from highly bearish (pessimistic) to highly bullish (optimistic)
  • Enduring high unemployment and low interest rates (normally just cause for equity market cheer, however)

Reasons for cautious optimism

Lingerings and lengthenings make for ill tidings, ditherings to boot, cf. mid-March of this year, but reasons for mild mirth yet remain, especially as to the next twelve months of equities pertain.

  • Rates are seriously low and look destined to remain that way which means the puppet masters are willing to plump rather than de-feather the economy, as with 2010’s austerity inception, to stop any rot
  • It is an amazing thought that the US has seen the lengthiest stint of economic expansion in its history given the backdrop of GFC over a decade ago. A recession she is now in, but at her nadir she is also, which bodes tidily for the possibility of the briefest of all recessions
  • Shops deemed ‘non-essential’ in the UK began to open a week ago or so, giving a host of high streets a much-needed shot in the arm and all the while, early-trial vaccines and symptom-bashing medicaments display promise aplenty
  • What popular appetite for a No-Deal parting from the EU remained has now blown to the fence and this augurs well for a Brexit deal that sees compromise on both sides
  • In addition to the Federal Reserve purchasing corporate bonds, as mentioned above, the President is apparently considering a much-needed $1trn infrastructure spending package – very similar to that which his electoral opponent is promising for his first 100 days. Much needed indeed – even in Manhattan the potholes can take tyres off cars

This article was written by Edward Downpatrick – Strategy Director, Fintuity

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