Stock market gains – green shoots or false hope?

While it’s never a good idea to focus on short-term performance, it’s been cheering to see some positive market gains in the past fortnight, as stock markets posted consecutive-day gains.

Since 23 March, in the UK the FTSE 100 and FTSE All-Share are up. In the US, the S&P 500 and NASDAQ have also risen. The Hong Kong Hang Seng and the Japanese Nikkei have increased too. Although from low bases. These rises, might – in-part – be down to the support that governments across the world have given.

This week has also seen the news that China is relaxing restrictions on Wuhan, the source of the coronavirus outbreak. Political leaders in Denmark, the Czech Republic and Austria have all announced plans to lift lockdowns – either reopening schools, or a selection of retailers.

No doubt, all eyes will be on these nations to monitor the success of the gradual lifting of these restrictions. If this is a success, politicians, economists, investors and households in other countries might then try to calculate when they too might expect similar measures. We’ll all be eager for them to succeed – and so will the markets.

But, it hasn’t been all good news. In recent weeks, dozens of companies have announced that dividends and share buybacks will be scrapped, suspended or delayed. This could put pressure on investors who rely on the natural income from stock dividends – particularly those in retirement.

It’s still too soon to say with certainty whether the recent increase in values is the beginning of the end, or simply an upswing typical of volatile markets before we drop again.

What we can say is that for all investors – whether you’re focused on income or growth, in retirement or decades off drawing a pension – the successful lifting of restrictions will be key in liberating the stock market and the economy.

There are options for income investors

Mark Dampier, Head of Research

It’s good to see that since my last article, governments and central banks have stepped up to the plate. They’ve begun to roll out the fiscal (government spending) and monetary (money supply) response that’s needed to weather this crisis. The attitude now seems to be “we will do whatever it takes” to keep the systems functioning.

The US Federal Reserve has pledged to provide liquidity in government bond markets and, for the first time, it’s also buying corporate bonds. Other central banks have been taking similar action and I think we’ll see more in the future. During the 2008 financial crisis it took around a year for central banks to stir into action – this time their response took a matter of weeks.

Governments have also taken action to try to support businesses and individual incomes. They recognise that the crisis is transitory and that temporary support will let businesses and individuals recover quicker. That said, the longer the crisis goes on, it seems inevitable that some businesses might go bankrupt.

We also think we’ll inevitably see some dire economic figures over the next few months – unemployment numbers are set to soar and business confidence figures plunged to depths not seen for decades.

To some extent, markets have already responded to the uncertainty - dropping in value in a way that reminds me of 1987, in terms of both speed and size of falls. We might well have seen the lows already. But, the measures put in by government and central banks have helped steady the ship.

That said, no one can accurately predict markets – calling the level of the FTSE 100 in six months’ time is even more difficult, if not impossible.

What will influence stock market levels?

So much will depend on getting some control over the virus – and much like calling the market, predicting the course of this disease has divided medical opinion. But, the stock market will be very focused on looking at the virus figures – awaiting good news such as a plateau – or even better – a fall in the number of new cases.

In the UK and especially the US, this might not be seen for some time. But, markets will be looking for that light at the end of the tunnel. Once those glimmers begin to show, they’ll start rising way before we see any improvements in the economic figures but of course there aren’t any guarantees.

For investors, apart from worrying about a falling market affecting the investment value, income is a real concern. As companies try to conserve their cash, many are stopping or reducing dividends. This will affect those relying on the income from these investments.

Once the crisis passes, we expect income to come back. Given government assistance in helping companies, it’ll likely be more gradual restoration. Following the 2008 financial crisis, we saw a bounce in capital values before dividends were re-instated.

But remember, past performance isn’t a guide to what might happen in the future, and all investments can fall as well as rise in value, so you could get back less than you invest. This article isn’t personal advice. If you’re unsure, seek advice.

Adding diversification to your portfolio

To diversify your portfolio’s income stream, one area of income that might be worth looking at is investment grade credit – high quality corporate bonds. It too has been hit by the crisis, so yields have risen, making a potential attractive entry point. High quality companies, with competitive advantages in sectors that aren’t fundamentally impacted by coronavirus should be in a stronger position when we come out of the crisis.

It’s a nerve racking time. But, making emotional knee jerk decisions is usually a very bad idea. Instead, as ever, focus on your long-term investment goals – no crisis lasts forever.

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