Michael McCulloch, Portfolio Manager
Earlier in the week, the S&P 500 Index in the US hit an all-time high, eclipsing the pre-crisis level and wiping away the market losses from the pandemic. The question this raises is whether investors are looking through this crisis and valuing assets in a post-crisis normality. We even had Apple become the first US company to pass the $2 trillion market capitalisation mark. After taking four decades to reach $1 trillion, it rallied off the lows in March, where it dipped back below $1 trillion, to reach $2 trillion in August. Interesting though is the difference between the stock market performance and the underlying health of the economy – the Wall Street versus Main Street debate. While the S&P 500 Index has rallied +51% since the March lows and recovered the losses suffered on an index level, 60% of companies are still not above their pre-crisis peaks and, on average, are still down 7% from the highs. As such, it is important to stress that the large global technology corporates are the ones reaching new highs, meanwhile the small independent businesses are still feeling the effects of the pandemic. It is at these moments that we remind ourselves of the importance of active management and a selective approach to stock picking.
The weaker US dollar has certainly aided the market rally in the US. Investors have taken this move positively as companies' goods have become cheaper to foreign buyers, as well as their overseas earnings becoming more valuable in dollar terms. The lack of fiscal progress has started to dominate what was initially a virus related move. There had been some optimism around the new pandemic stimulus package, however this has been delayed with each party using this to their political advantage. The belief is that the Democrats could agree a deal with the Republicans before introducing additional bills after the November election.
Elsewhere, as a result of lockdown measures, the UK economy entered a recession following a record decline of 20.4% during the second quarter of the year. This follows a contraction of 2.2% in the first quarter and is the most severe contraction by any developed economy due to the global pandemic. Despite this headline figure, UK economic growth picked up in May 2.4% and 8.7% in June, signaling a rapid rebound in activity following the large contraction in April. Estimates from the Bank of England showed that the UK economy will not return to pre-pandemic levels until Q4 2021 and expects a rise in unemployment towards the end of this year. The large decline in second quarter GDP in the UK exceeded the fall of 9.5% in the US and 12.1% in the Eurozone. This underperformance can be attributed to the later lockdown and subsequent slower easing, as well as services, which form the largest component of UK GDP, being the hardest hit. However, the poor performance of the economy combined with the highest death toll in Europe, raise questions over Prime Minister Boris Johnson’s handling of the pandemic. While the stock market performance remains sensitive to the daily news flow on COVID-19 and Brexit, we have seen more stability over the summer months as investors gain more confidence in the rebound. Since the lows on 16th March 2020, the FTSE 100 Index has returned 24%. The UK has lagged other global markets due, in part, to the uncertainty still surrounding Brexit but this could also be as a result of the stock index having less exposure to the high quality growth companies, which have performed so well.
As market performance over the summer months has quietened down, so too has the volatility within markets as measured by the VIX Index. This is a gauge of the level of fear within the market. The index fell to a new low since the pandemic started of 21. While both the S&P 500 Index and the fall in volatility should give investors' confidence that the market has stabilised and all is well in the world, we remain cognisant as ever of the risks on the horizon that we are closely monitoring.
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