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Market Comment June 2020 - Buy In May & Stay!

The effects of the Corona virus are in plain sight. The economic statistics for the first quarter of 2020 and the month of April are dreadful. Statistics rely on data and data is historic. Hence, statistics help us analyze the past. Economies have ground to a halt, factories were closed, social distancing forced staff working from home, schools and universities closed and kids turn to e-learning. This is all quite bad. Financial markets, on the other hand, trade the future. According to the financial markets, the future looks bright. Prospects of economic recovery have certainly registered across global equity markets during May. Even European equities are pushing higher and the S&P 500 trades above 3,000 points. Whether the trend is sustainable is very much a topic of debate. Still, the positive signs abound. Risks also abound. There are medical concerns:  a vaccine for the coronavirus may yet be several years away and top scientists have warned that the colder months in the North American and European fall may bring about fresh outbreaks that lead to more shutdowns, hampering a recovery. There are also employment concerns: while many staff will probably be recalled once lockdowns are relaxed, depressed income and spending, lingering virus fear, and mandated capacity restrictions could mean that some ‘temporary’ lay-offs could become permanent. Other risks have lingered on while our attention has focused on the pandemic. Mr. Trump is stirring tensions with China once again; Iran defies all sanctions and the UK still has not negotiated its Brexit deal. Still the financial markets are buoyant. Rallies that started in the tech sector with the lockdown winners are now beginning to expand beyond the mega-cap tech stocks that have emerged as a haven for investors through the turbulence this year — a signal that a broader range of buyers is joining the stampede.  Cyclical stocks and small caps have enjoyed bumper gains over the past weeks as investors show new support for economically sensitive companies. Those priming for another big sell-off may have to wait. Policymakers on both sides of the Atlantic have indicated they are ready to expand the record amounts of fiscal and monetary support and all states are either relaxing their shutdowns or have reopened. Pushing back against the current optimistic equity sentiment (or perhaps relief that lockdowns are easing) requires a profound shock. The rally has built a legion of sceptics who worry the market is being driven entirely by central bank stimuli and that bullish investors are too confident a vaccine will emerge to rekindle corporate profits. Now, the market detractors are reluctantly joining.

Switzerland, June 2nd, 2020


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