Benign April carries hidden dangers

Crazy March, described in my last blog post gave way to a benign April, so far. Like the weather global stock markets have been warm and sunny. According to AJ Bell Investcentre data from Refinitiv shows equities have sharply rallied from their lows on the 23rd March. The S&P 500 a more representative index of US stocks than the Dow Jones Industrial Average rose 28.5% whilst the FTSE All World, a broad based global equity index gained 24.7%. The FTSE 100 index put on 16.4%. With seemingly unlimited fiscal and monetary stimulus, falling coronavirus infection rates and talk of easing of lock down restrictions in various countries investors could be fooled in thinking the worst is over. However the history of stock markets crashes shows us that during bear markets there are frequent intermediate rallies which eventually subside before the final bottom is reached. The market effectively capitulates to the reality that things are bad, really bad. The rallies prove to be dead cat bounces. This can be seen during the global financial crisis from 1/1/08 to 6/3/09. Data from Financial Express (again cited by AJ Bell Investcentre) show alternating corrections and rallies lasting up to a month or two. For example from 3/9/08 to 10/10/08, which included the collapse of Lehman Brothers the MSCI World Index fell 27.9%. From 10/10/08 to 4/11/08 it rallied 17.3%. A further fall of 16.5% followed over the next 16 days. Overall the market was down 36.5% over the whole period of 1/1/08 to 6/3/09 despite four rallies. Interestingly every subsequent correction drove the market to a new low.

The reality is this has all the appearance of being the worst economic crisis for nearly 100 years and it may prove to be more potent than the Great Depression of the 1930s. The Federal Reserve Bank of St Louis suggested that more than 47 million Americans may end up being out of work in the US i.e. 32.1% of the workforce, well above the 24.9% at the height of the Great Depression. In the UK I saw a jobless figure of 21% quoted. These may be worst case scenarios – the damage will depend on the extent of company failures and the ability of governments to provide lifelines to protect jobs. Everyone wants support from the government but surely there are limits and they can’t save all businesses. Companies that do survive will see earnings slashed and dividends cut. That will feed through to lower share prices. The point is that eight weeks or so into the crisis it is still too early to assess the extent of the real damage to the global and UK economy. Investors are advised to remain cautious. The current rally may be followed a further sell-off.

The content of this blog are my own views.  It is intended as general investment information only.  Nothing in this article should be construed as personal investment advice. You should seek individual advice based on your own financial circumstances before making investment decisions.