Global risk sentiment is all over the place – the first quarter of 2020 saw the fastest 30% drop in the history of global equities followed by the largest 50-day advance in market history in the second quarter.   So now we’re at the halfway point of 2020, and I am still not sure if it has gone ridiculously slowly or bindingly fast….. most people I speak to agree we’ve been in some strange time warp. 

Conflicting messages and competing influences are creating uncertainty: share markets are climbing and restrictions are easing in many places which is promising for struggling economies, but in many of those same countries new virus outbreaks are starting to appear.  In Germany, scientists are warning of what they call “prevention paradox”, which describes complacency about the virus leading to behaviour that triggers a second wave of infections.   

That is a good segue to the US, where complacency certainly seems to be present. The New York Fed released a report showing that even before the relaxation of restrictions, social distancing was declining. Not surprisingly we are now seeing a significant increase in the number of new cases in the US which looks like it is now at the start of a second wave.  After appearing reluctant to reimpose restrictions, authorities in numerous southern and western states including Florida and Texas are now doing so.  How this evolves in coming weeks will obviously be crucial and could well test the optimism of overvalued risk assets.

Still in the US, weekly unemployment claims data suggest the improvement in the unemployment situation seen last month may have stalled. A recent survey by the Conference Board showed many large US firms expect to be laying off more workers, while others say they are likely to be slow to rehire.  In Australia consumer confidence seems to be plateauing after recovering from its late March trough, and major job losses at iconic businesses like Qantas will not help.

But while valid concerns remain about the fragility of the recovery in the face of a second wave, the fact that this is an election year in the US means that all stops could be pulled out to ‘juice the economy’ through 2020, and we know how markets love that. Fidelity International’s article later in this Newsletter describes some of the competing factors very well, for example how the US Fed will keep rates at 0% until at least 2022 and exceptional support measures mean that the US Household Savings Rate is at an historic high, but at the same time the Fed’s support packages will stop sometime and geopolitical risks are heightened as anti-China rhetoric is ramped up.  

It all adds up to uncertainty and as things stand investment markets still seem vulnerable to having priced an overly optimistic outlook.  On the other hand we’ve also seen that it is a fluid and rapidly evolving environment and the environment can change quickly.  We’ll remain focused on working with our research partners to stay on top of changes as they happen and across new data as it emerges. 

Sources: RBA, Quilla Consulting, Fidelity International, AMP Capital.