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We’re not in Kansas anymore

For financial professionals only

Short-term moves, long-term questions

We are in new territory. This health crisis has caused unprecedented disruption in stock markets. From a dramatic fall as the scale of the pandemic was realised, lockdowns have seen stock markets stage a rapid recovery – almost to levels pre-Covid.

Yet the long-term economic outlook remains shrouded in uncertainty. Has the stock market gotten ahead of itself, or will the short-term disruption prove benign?

Action stations

First, Central Banks around the world were swift to act. Lower interest rates and the resumption of QE signalled they were serious about providing liquidity and ensuring the monetary system would function.

The rapid implementation of furlough schemes and other measures by governments has supported incomes during the lockdowns. Other positives included the worldwide search for a vaccine and progress in lowering the infection curve, plus healthcare systems being assessed. All these positives no doubt helped sentiment.

Yet there are serious questions with no answers about what lies ahead – and these could derail the stock markets.

Dealing with what ifs

What if there’s a second, higher wave of infections as restrictions ease?  There is already some evidence of localised spikes as restrictions are lifted.

How many jobs will survive the end of furlough schemes if companies struggle? Redundancies are increasing day by day in the likes of the airline industry, retail, and engineering companies such as Airbus and Rolls Royce.

With a forecast rate of 10% unemployment in the UK, what will happen to consumer spending? The government would like us to spend but will we save more, just in case?

Finally, let’s not forget the government’s largesse has raised debt levels. With plans for infrastructure spending and a mantra of “build, build, build” this may increase further. The UK has now joined the club of nations where debt is greater than 100% of GDP.

Looking ahead

The short-term data that drives short-term market moves may indicate the pace of economic recovery. Mobile phone usage, traffic congestion, air pollution and credit card transaction data is more immediate than traditional, backward-looking economic indicators.

It will be interesting to see company results over the next year. What impact will we see on cash flows and balance sheets? Will we experience inflation, as disrupted supply cannot keep up with demand?  Or deflation, as spending ebbs and prices have to be cut?

A clearer picture

Hopefully over the next quarter we will know much more about the Covid virus and how to deal with its effects. We should also know more about how economies are being impacted and the effects, both in the short and long term.

Right now, there remains great uncertainty. But every day brings new learnings, helping us look ahead as the fog begins to lift.



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