Multi-Asset market review

August 2020

No one can be surprised that August brought news the UK is officially in recession, with the economy suffering the biggest slump on record between April and June as GDP fell 20.4% and wiped out close to two decades of growth.

This is the first technical recession, defined as two consecutive quarters of economic decline, since 2009 and brings further cheer to a summer of travel and exam chaos, ongoing employment uncertainty across huge swathes of industry, and endless debate about the logistics of getting children back to school. Small comfort it might be, but the ‘good’ news is that the macro picture is actually better than many predicted: the UK economy bounced back in June as restrictions on movement started to ease, with 8.7% growth over the month on top of 1.8% in May.

Just to show the world is genuinely in this together, Japan also revealed its economy has shrunk at the fastest rate on record, with GDP down 27.8% over Q2 compared to the same period in 2019. It had already slipped into recession earlier this year following those two successive quarters of contraction (Q2 marked the third and the country’s worst performance since 1955). Japan remained in the news in August with the announcement that prime minister Shinzo Abe is set to resign on health grounds. Abe recently became the country’s longest-serving leader as he broke the record set by his great uncle Eisaku Sato from 1964 to 1972, but has long been dogged by health problems, with his first spell as prime minister ending abruptly in 2007.

Abe’s term was due to end in September 2021 but he said he did not want his illness to lead to mistakes with important policy decisions in what will clearly be challenging months ahead. Full analysis of the economic and wider impact of Abenomics deserves more room than we have here but it will be interesting to see whether this signature policy lasts beyond its architect and how Abe’s successor guides the country in the wake of Covid-19.

As we have written monthly for at least the last two or three years, markets continue to close their ears to economic distress and the S&P 500 has already roared back to all-time high territory, just over 120 working days since its last peak in February. This has been by far the fastest recovery on record, with the average time between bull highs more than 1,500 trading days on the S&P. The previous shortest time between peaks was 310 trading days from 9 February 1966 to 4 May 1967, and keep in mind as well just how quickly the market lurched down almost 40% to its low on 23 March.

The fastest bull market following on the heels of the fastest bear has clearly been positive for investors and meant those paper losses (assuming people were not panicked into selling) have been quickly wiped away. Beyond that, however, we continue to question what it says about the ever-loosening connection between markets and fundamentals; despite the ascent, few would be brave enough to make the case that the S&P’s rise reflects a V-shaped economic recovery.

Unsurprisingly in such an environment, our monthly check in with the latest global fund manager survey from Bank of America shows investors at their most bullish since February, moving past bear market rally to bull market recovery in terms of mindset.

To a large extent, US technology performance has been behind this jettisoning of fundamentals and any debate about equity returns is primarily about these mastodon stocks at present. Recent earnings again underlined the strength of these businesses with Apple, Amazon, Alphabet and Facebook collectively adding around $200 billion to their market values after reporting on the same day and Apple becoming the world’s first $2 trillion company, just two years after breaching the $1 trillion level. In early September, however, many of these stocks were hit hard as investors took heavy profits: Apple fell 8% in a single day and shed $180 billion, the largest one-day drop for a US firm.


In the interest of fairness, as we offered a more bearish case for FAANGs (or FAAMNGs, with Microsoft included) in July, there are plenty of market watchers who believe these stocks can continue to soar, despite recent weakness. While many highlight Antitrust issues as a potential headwind, there is an opposing train of thought that the regime has become less stringent since the 1980s and a significant regulatory push against, or break-up of, big tech firms is unlikely in the absence of major political change.

We remain cautious on the US, however, and would note a couple of valuation points from economist Robert Shiller. His cyclically adjusted price/earnings, or CAPE, ratio for the S&P 500 climbed to 31 in mid-August, which was only previously higher before the Great Crash of 1929 and at the very top of the TMT bubble. Long-term interest rates, by Shiller's calculation, have also never been as low and a huge amount appears to be riding on a lower for lower central bank approach.

All of this is a vital component of the impending generational election in the US, with the country engulfed in race riots once again, seemingly as divided as it has been for at least a century and featuring Trump and Biden trading barbs. With Covid-19 figures continuing to pick up across the country, the President again revealed his unerring ability to identify tentpole issues: the correct water pressure in his shower to get ‘perfect’ hair. A poll from Politico revealed the genuine key topics among the American electorate, with the economy top at 76% of voters, Coronavirus third (after healthcare) with 73%, and relations with China bottom of the pile at just 42%.

Signalling the current poor state of the latter, the two countries postponed talks during the month designed to review progress of the phase one trade agreement signed late in 2019. A call between the two sides eventually happened in late August but reports were light on detail, only mentioning ‘progress’ and ‘commitment to take the steps necessary to ensure the success of the agreement’.

Given the ongoing reference to the China virus from the US, tit-for-tat consulate closures last month and Trump’s campaign against TikTok, however, it hardly needs a roomful of bureaucrats to provide a report card on this situation.

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Please remember that past performance is not a guide to future performance and the value of an investment and any income generated from them can fall as well as rise and is not guaranteed, therefore you may not get back the amount originally invested and potentially risk total loss of capital.

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Tuesday, September 15, 2020, 10:54 AM