A quick announcement before we get into the thick of it - we'll now send you a copy of What's Going On every week. We hope it helps you make sense of key developments taking place in financial markets throughout these historic times.
Now, for some jaw-dropping economic data
Yesterday, a couple of major economic data releases confirmed what we have been seeing all around us, across the world: the global economy is on its knees.
Unsurprisingly, economic data is looking bleak on a whole new level of "wow - this has never happened before". And the worst is yet to come given economic measures for March only capture the start of the lockdown with some countries going into stay-at-home mode over the last 2 weeks of the month.
In Europe, the Composite PMI reading - a measure of economic activity across Eurozone countries - came in at a 29.7 reading for March 2020 versus 51.6 in February. That's a 42% drop in activity and the lowest reading since records began.
Meanwhile in the US, the monthly jobs report revealed a staggering 701,000 drop in non-farm payrolls for March which translates into a 4.4% unemployment rate, up from 3.6% in February - signalling the US labour market is under stress. Interestingly, the non-farm payrolls number and consequent labour market data are based on readings taken as of 12 March - before the stay-at-home effects really kicked in on the US economy. Investors expect the unemployment to rise up to and potentially well beyond 10% over the next few months as the brutal economic reality kicks in.
Economic Data vs. Market Data
Now we've started this one off on a pretty dismal note, but this is where things get interesting: financial markets barely stuttered when presented with this data. Under normal circumstances, these kinds of shifts in economic data would spur gigantic moves lower across most financial assets. But not this time - so let's have a quick look at why this has been the case.
Market psychology feels less fragile compared to the shell-shock in March
Investors seem to be better braced for this slowdown and the inevitably dramatic swings in economic data releases than they were last month, even if economists are not (as an example, the consensus expectation from economists was for a 100,000 drop in US non-farm payrolls versus the 701,000 number that we saw). When you already expect things to be pretty horrific, it can appear less alarming when you're eventually presented with that reality.
Stock markets could be bottoming out
The ongoing economic fallout from the new stay-at-home normal could have been priced in during February / March. Stock markets on both sides of the Atlantic Ocean have already declined between 20-30% over the past 6 weeks. You could argue that the stock market is starting to find a bottom here, but that doesn't amount to a call to start blindly investing in stock markets. Current market prices likely factor in an economic fallout which lasts throughout April & May - if it starts looking like we'll be staying at home for longer, we wouldn't be surprised to see things move lower again.
Stay-at-home winners & losers
Clearly, some sectors and types of businesses will benefit from the new stay-at-home normal, while others will suffer. This becomes apparent when you look at year-to-date sector performance, so let's have a quick look at the S&P500 for reference:
Consumer Staples -13%
Info. Tech. -14%
Comms. Serv. -19%
Consumer Discretionary -23%
Real Estate -24%
When you take account for the fact that the top 5 sectors above - or those who have seen declines of less than 20% - account for 63% of the S&P500 index versus the bottom 6 sectors which account for 37% of the index, it becomes easier to understand that companies which have been hurt the most actually make up a relatively smaller part of the overall stock market. Many companies are struggling to stay alive, but many more are also actually doing ok.
A final reason which might help explain the muted market reaction in response to rapidly worsening economic data can be chalked down to fiscal policy. Governments across the world are unleashing spending plans and beefing up social security programs like never before, but the effects of these plans will take a few months to really kick in. The fact that so much fiscal spending action has been agreed and announced inevitably helps investors feel more comfortable overlooking the bleak present in favour of a more optimistic future.
So what does this all mean if you're thinking about your own investment decisions?
We laid out a potential strategy and how to think about it for yourself last time which we encourage you to read through if not already done. This time, we'll run through a quick update below having taken into consideration all that has happened in the last 2 weeks:
Given market psychology feels slightly less chaotic, we think the "downside risk" to investing in stocks now is slightly lower compared to what it was a few weeks ago. That's not to say it has completely gone away though, so while it could be a good time to start averaging into equity markets, you should proceed with caution
Proceeding with caution means trying to choose companies, funds, themes and/or trends which will be resilient throughout this period of economic turmoil and trying to avoid the riskier corners of the equity market
A long term approach will put you in good stead. Market volatility remains heightened and if you're not an experienced / sophisticated trader without powerful datasets at hand, trying to make short-term trades in the midst of all this will likely be an efficient way to lose chunks of your money, and there are probably more fun ways of doing that if you really wanted to
So that's it for this week - welcome to the new stay-at-home normal - we look forward to keeping you up to speed with the latest on a weekly basis going forward.
Until next week, stay safe, and stay at home!
Please know, the value of investments can go up as well as down and you may receive back less than your original investment, meaning, when investing your capital is at risk.
Disclaimer: At Evarvest we believe in making investing and investment education more accessible, but we don’t provide investment advice and individual investors should make their own decisions. While we try our best, we cannot ensure the accuracy of the information we provide.
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