Taking stock of world markets

If it turns out to be true then someone had better tell the stock market. The FTSE-100 index in the UK has bounced by more than 20 per cent from its low point reached on March 23.

Usually such an increase in such a short space of time would herald the start of a bull market but with global economies in uncharted territory for all the wrong reasons and so many unknowns for an as yet unspecified length of time there is a clear disconnect between stock market resilience and what seems to be happening in the world at large.

This may be confusing but I have three possible explanations:

1) “Don’t fight the Fed”. This is one of the oldest mantras. What it effectively means is that only the foolhardy would take an opposing position to the Fed (or any other central bank of substance).

Although opinions differ on the efficiency of the world’s healthcare response, one thing to be lauded is the speed with which governments and bankers have acted to protect individuals and businesses from the harshest immediate impacts of economic sclerosis. Interest rates have been slashed. Unprecedented job retention schemes have been swiftly implemented.

If this were a game of poker, central banks would be said to have gone all in. The UK chancellor Rishi Sunak said the Government will do “whatever it takes” whilst launching a £350bn

package of loans and grants to businesses. Fighting talk indeed.

2) Stock markets don’t move in sync with economic data. Markets are generally forward looking hence the FTSE reading today is looking at least six to twelve months into the future. If there is one thing that is certain it’s that there will be some degree of economic recovery following weeks of draconian lockdown measures.

Whether the snap back is as robust as some are predicting, the so-called V shape recession, remains to be seen.

3) Interest rates have been cut further and will likely stay lower for longer. Not that long ago the pathway for future interest rates seemed to be up rather than down. Coupled with central banks pumping liquidity into the system, near-zero rates mean a wall of ultra-cheap money looking for a home.

The argument is that at least part of this may find its way into equity markets. Arguably this is fostering an element of speculation with people believing that some shares are “cheap” because they have fallen in value. Time will tell.

There is a fourth, altogether less palatable, explanation. Markets may have got it wrong. Historians will point to the fact that, in the bear markets of both 1929 and 2008, the Dow Jones Industrial Average staged rallies of 36 per cent and 28 per cent respectively before plumbing new lows.

It actually took nearly three years for the Dow to reach its nadir post 1929 and around 16 months post 2008. If any evidence were required of the severity of the market volatility we are

witnessing, look no further than our own flagship fund, the CFP SDL UK Buffettology Fund. It recorded its worst ever monthly performance in its nine year history in March (down 18.4 per cent for the record) only to be followed by its best ever monthly performance in April (up 14.1 per cent).

When faced with extreme conditions like these, it is best to have a strategy. There is a name for people who consistently call the bottom (and top) of markets: liars. It is possible that you may get lucky and make like a bandit but it is also possible that markets will turn the other way and you will lose your shirt. The current market has the potential to make a fool out of anyone.

Much has been written over time on the virtues of pound cost averaging: in a nutshell, by dripping money into an investment in smaller chunks rather than all in one go it helps smooth out the average cost of the holding.

Whilst if markets rally strongly it is possible you miss out on putting all your money in at the bottom, it also means that you get to buy in cheaper if markets have further to fall. Until there is greater clarity on both the pathway to recovery and some of the structural shifts in behaviour that this pandemic has likely wreaked on society it might make good investment sense.