Season of change?
It could be an unsettled autumn for investors as markets face a number of uncertainties.
Markets have staged a remarkable comeback over the last six months. As a result, the coronavirus-fuelled bear market was the shortest in history. But September saw a slide in stock prices that really came in two stages: initially, a sell-off in high-flying tech stocks, then over renewed concerns about rising COVID-19 cases and the US government’s response.
That second phase may set the tone for the next few months. If it does, investors would be wise to remember the lessons from earlier in the year and sit tight. As the chart below shows, investors who lost their nerve early in the pandemic would have missed out on the strong recovery.
Source: Bloomberg. Data shown is for the S&P 500 Total Return Index. Past performance is not a guide to future returns. Illustrative index returns do not take account of the costs and charges of investing.
|Aug 19–Aug 20||Aug 18–Aug 19||Aug 17–Aug 18||Aug 16–Aug 17||Aug 15–Aug 16|
|S&P 500 Index||10.2%||9.1%||17.9%||
Source: Financial Express; data shown for S&P 500 Total Return index. Past performance is not a guide to future returns.
The first wobble for markets came in the early part of September. The US market had (again) led the recovery, driven by a speculative summer surge in the tech stocks that dominate its indices. Investors eventually realised that the remarkable rally in those stocks was unsustainable. Having given back the gains made in August, however, the less-inflated valuations suggest that we are unlikely to see another big downturn in the tech stocks soon.
More recently, though, investors’ attention has shifted to more fundamental concerns. Markets face a confluence of headwinds as autumn approaches, none of which may throw them off course on their own; but collectively, they could present a considerable challenge in the short term.
• Fears of a second wave of the COVID-19 virus now appear justified, as daily case numbers rise in both the US and Europe. The combined number of new recorded cases each day in the UK and Europe is now higher than in March1, when lockdowns were put in place and equity markets slumped. The re-imposition of restrictions threatens the economic recovery and, although the data is still improving, it is stuttering.
• Nearer to home, this week sees the final round of formal trade talks to secure a Brexit deal. The UK government has said it expects informal discussions to continue up to a meeting of the European Council scheduled for 15–16 October, but the likelihood of a negative outcome is increasing as the end of October deadline nears.
All these headwinds are now in play, which means that it’s realistic for investors to expect a choppier ride over the next couple of months. Just as earlier in the year, it will be important to avoid a knee-jerk reaction.
1European Centre for Disease Prevention and Control, 30 September
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