Worldwide Recession. Yet the stock markets reach ever higher:
You’ll have been hard-pressed to miss the fact that a worldwide recession is looming. Current World Bank forecasts even indicate that this will be the worst we’ve seen since WWII. Ever the optimists, the Treasury has also stated that it could take until the end of 2022 for the British economy to recover.
It’s not all bad news, though. In the face of a worldwide recession, global stock markets tell a more positive story. Since the trough in mid-March, markets have been steadily rallying, with US stock indexes leading the way. So much so, that many markets are already close to fully erasing their recent losses.
If you watched the markets back in February and March, you will have witnessed the market’s sharp decline. You will probably have also watched the economic chaos that ensued. Since then, though, things have generally been positive for the stock markets. As such, many investor portfolios are close, or indeed have, recovered to their pre-Covid-19 levels.
Where economic news and stock market performance diverge
You’d be forgiven for thinking that the stock markets and the economy are the same things. But, while they are closely related, the stock markets are not the economy.
Stock investors are interested in a longer-term game. So, they will be looking beyond present conditions with an eye to the future. Thankfully, at the moment, they are taking an optimistic view.
There are several reasons why they remain optimistic in the face of a worldwide recession:
- Governments have been quick to shell out substantial support packages and measures specifically designed to stimulate the economy. In the UK, the furlough scheme is probably the most well-known example of one of these. But there have also been loans to support businesses and support for the self-employed. Rishi Sunak also introduced a further support package that ring-fenced £30bn for protecting jobs, supporting younger worked and encouraging spending. It was a wise move on the part of the Chancellor. All the time governments continue to support the economy, investors will be willing to look beyond the current economic turbulence.
- The medical news around coronavirus shows promising signs for investors. While we can not ignore the havoc the virus is causing around the world, development of a vaccine and other treatments are well in sight. If a vaccine becomes available for the masses in early 2021, as currently expected, life may return to ‘normal’ far sooner than first thought.
Having said all of this, there is no foregone conclusion that the stock market surge will last.
A Second Wave
Dare we say it, but the ‘second wave’ of Covid-19 could well reignite the economic fires the governments have been trying so hard to put out. The consequences of a second wave would require countries to implement even stricter social distancing measures that would surely further dampen consumer spending. Given the enormous efforts needed to ebb the original outbreak, it is also highly likely that ministers will not be able to extend the kind of economic support measures made available during the lockdown.
Such a resurgence of events would, in all likelihood, damage investor confidence in the future, causing stock markets to fall once again. With the recent relaxing of lockdown measures and the re-opening of businesses, it is easy to think the Covid-19 pandemic has ‘gone away.’ Yet it is important to bear in mind that the turmoil we are seeing in the economy is but a stark reminder that the implications of a global pandemic are far and wide-reaching. It impacts nearly all areas of life. So, now more than ever, perhaps, it is crucial that we remember to continue to take appropriate measures to keep one another safe.
As always, if you are concerned about the current economic situation on your finances and would like to speak to one of our reputable advisers, please do call us on 01243 767 469. Alternatively, you can email us from our contact page, and an adviser will be in touch.
Written by Ben Griffiths
Ben is a financial planner from our Whiteley office. While he specialises in pension planning, Ben is also able to generalise into all other areas of financial planning.