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Lockdown 2.0 – will this time be different for the UK stock market?

We look at what a second lockdown could mean for the stock market.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

William Ryder
Equity Analyst

Published on 12 November 2020

This article is more than 6 months old

It was correct at the time of publishing. Our views and any references to tax, investment and pension rules may have changed since then.

Hopes around the world were lifted this week as news spread of a potential vaccine for Covid-19.

There’s no doubt that a successful vaccine could help us all return to some sort of normal. But there’s still lots to be answered before we can start casting Covid-19 to the back of our minds.

The fact is that lots of us in the UK are still in lockdown and this is still going to impact the stock market, economy and thousands of businesses.

The question in the short term though is how different will this time be?

We’ve looked at how the stock market’s done since the first-time round and explain why this time might be a bit different.

What’s happened since the first lockdown?

By the time the second lockdown started (5 November), the UK stock market (with dividends reinvested) had already dropped 19% since the start of the year (to 6/11/2020). However, most of these losses came before lockdown, starting at the end of February and beginning of March. Since then, UK stocks have actually gained ground.

UK stock market with dividends reinvested

Past performance is not a guide to the future. Source: Refinitiv, 09/11/20.

What’s happened over the last few months prepared markets for a second wave, so we haven’t seen another market sell off yet. But returns haven’t been spread evenly between the various sectors.

As demand tailed off amid reduced activity in the economy, we’ve seen a low oil price, which has hit oil & gas groups. Low interest rates and the potential for high defaults (borrowers missing their repayments) have similarly punished banks. All investments fall as well as rise in value so you could get back less than you invest.

UK stock market Sectors

Scroll across to see the full chart.

Past performance is not a guide to the future Source: Refinitive, 09/11/20.

What we’re seeing here is the difference between the panicked expectations of early March, and the reality of what’s followed. That’s why there are a few surprising sectors that have done well since the first lockdown began.

For example, the travel & leisure sector has performed well. Although the shares are still down heavily since the start of the year, the sector’s proven to be more resilient than first thought.

So what can we expect from lockdown 2.0?

We’re all lockdown veterans now and have hopefully avoided panic buying loo roll or panic selling our investments this time around.

Lots of businesses seem well prepared for home working and have figured out their social distancing policies for employees that need to be on site. We’ve also seen how the furlough scheme and other government support measures have been easing some of the pain. As a society, it seems we’re much better prepared for the second wave of infections than we were the first.

For companies, though it won’t be exactly the same, we think this lockdown will follow lots of the patterns set by the first. For example, car insurers are likely to receive fewer claims as we drive less. Sales might struggle at retailers without a strong online presence and demand for oil could fall if restrictions become widespread.

However, this doesn’t mean share prices will react in the same way. Firstly, we haven’t had a mass sell-off yet. Secondly, and perhaps more importantly, it’s only unexpected developments that should move share prices.

This means we shouldn’t expect the market to repeat its performance of the last six months – past performance isn’t a guide to the future.

2020 has managed to defy pretty much everyone’s expectations though, so we wouldn’t rule out further curve balls. As always, the important thing is to stay diversified and avoid over trading on the back of news headlines.

This article isn’t personal advice. If you’re at all unsure then please ask for advice.

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