V, W, U, L, Z - the Scrabble board of possible market recovery scenarios seems to be getting smaller, the more we get used to the rebounds seen around the world since March.
For now, stimulus-backed rallies have brought global shares broadly back in line with pre-lockdown levels. Investors painting their own versions of a new tech-led global economy after the virus-induced inflection point have even sent parts of the market screaming upwards, accelerating trends already in motion over the past few years.
The problem with such a sharp snap back is that, once we breathe the initial sigh of relief, the very next thought is whether it was actually justified and, more importantly, if it’s sustainable. And even in an internationally-exposed index like the FTSE, investors search for overall signs of that sustainability in the health of the domestic economy.
Speaking to the Treasury Select Committee this week on just that, Bank of England chief economist Andy Haldane made sure the uncertainty of the UK’s journey ahead was clear: “The V is a description of the past, not a prediction of the future. So far it has been a V, that of course doesn’t tell us about where we might go next, and we have still seen a daily diet of news about redundancies across industries.”
Still "so far, so V"?
Haldane told the Committee UK economic activity had risen around 1% each week over the last 10 weeks, meaning approximately half of the 25% drop in activity during March and April had been recouped.
But the nation’s unemployment trajectory still needs the attention of economists and investors alike, with Haldane highlighting possible inaccuracies. Despite a situation “materially better than we would have expected two or three months ago” Haldane said the current ”questionable” numbers understate reality.
Forecasts had predicted a rise in unemployment of up to 9%, however figures from the Office for National Statistics (ONS) puts the situation just below 4% currently.
Haldane’s economic analysis might suggest things could get worse before they get better. The end of the furlough scheme later this year might lay bare the jobs currently living on borrowed time - those which can’t be justified by businesses without government support.
And while the UK’s stock market has rebounded, there will need to be evidence that the economy can stand on its own two feet before full confidence returns.
More stimulus ahead?
On the future path of interest rates, Haldane said quantitative easing measures and the possibility of negative interest rates are now being reviewed.
“If there was a further negative shock to the economy we would need to think about further lowering of the cost of borrowing,” he said.
More stimulus measures have the ability to spook investors as much as encourage them, given the extraordinary fiscal and monetary measures already rolled out. However, it has mainly been central bank efforts and a lingering memory of 2008 fuelling the market recoil thus far - stopping short now because of fears of how it is all to be repaid risks missing what Haldane is focusing on: the here and now, with a cautious approach to the future.
If the path from here is to be uncertain, and the V starts to look like a W, investors ready to get back into the UK market might find a few attractive entry points before the year is out.
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