Market Comment 8/07/2020

The second quarter ended with the US stock market enjoying its strongest three-month period for 22 years, with the broad index rising by 20%. Coincidentally, in the first quarter, the same index fell by 20%. Although arithmetically it does not quite get you back to where you were, it feels pretty V-shaped to most observers.

So, is a V-shaped market recovery justified by the economic data? At first glance, the numbers would tend to support this. Whether it is jobs data in the US, retail sales numbers in Europe, or global leading indicators, in most cases the bounce-back has been better than many forecasters were expecting. Andy Haldane, the Bank of England’s Chief Economist, last week characterised the UK’s economic recovery as V-shaped. It will take time, however, to know how many furloughed workers will have full-time jobs to return to, or indeed, when the first round of pent-up demand is satisfied, how much consumers are willing to continue spending.

Globally, coronavirus is still spreading. Countries are emerging from lockdown as pressure mounts to do so. There is a trade- off here and the hope is that higher infection rates do not lead to correspondingly higher death rates. Meanwhile, work continues on medical treatments and vaccines.

Stock markets have started the second quarter in positive fashion, bolstered by liquidity injections from central banks and direct intervention by governments to soften the impact of earlier lockdowns. There is optimism that wholesale economic shutdowns such as we saw in April will not recur and that life will slowly but surely get back to normal. Markets are telling us this – it remains to be seen whether human behaviour follows suit.