It is all about the Fed. Chairman Jerome Powell’s US Federal Reserve has led the way, closely followed by central banks around the world.
They’ve been providing massive liquidity and continuing to surprise with the extent of ‘doing whatever is required’. The lessons of 2008/9 have been respected and their actions have probably insured that a nasty COVID-19 induced recession does not turn into a full-blown financial crisis with dire consequences for employment.
What their actions have done is re-price assets after the collapse in March, over the past few weeks, the S&P 500 has risen another 7% while European stocks shone with a 12% recovery, thanks in particular to good figures from Germany, however London has lagged again. The S&P’s rise took it back to being unchanged for the year before a reaction set in, the NASDAQ is ahead by around 10% for the year reflecting the strong performance of big tech. These moves have caused some consternation, but overall there is a decent rationale in the light of sovereign bond yields. The US ‘risk-free’ rate, the 10-year bond yield, has more than halved over the year (1.9% down to 0.75% currently), with a similar pattern in the UK, providing strong valuation support for equities (a jump in the equity risk premium if preferred).
UK 10-year gilt yields edged lower, while they rose slightly in America, though the latter ‘shocked’ with much better employment and retail sales figures than expected. It would appear that varying treatment of furloughed staff is causing some confusion. As in the UK, most European sovereign bond yields are negative out to five years, a situation that seems unlikely to change in the near future. Meanwhile, credit markets remain extremely active with record levels of primary issuance meeting huge demand. Spreads are steady at the improved level and there is value to be found.
We are no clearer as to how much damage will eventually be seen to have been done to the world economy. While Europe is clearly recovering from the pandemic (the UK being a rather depressing laggard), COVID-19 has moved on to devastate a number of emerging markets and is clearly having a resurgence in Texas (lock-downs do not sit well with Texan views on liberty). There is clearly a massive international effort towards a vaccine, with a number of serious contenders in trials, though this still needs more time and there have been some treatment breakthroughs (Remdesivir and now Dexamethasone).
The impact on corporate earnings will be hugely variable, which accounts for the equally variable performance of individual stocks (and corporates’ ability to access credit markets), at which point the ‘equity risk premium’ argument completely breaks down, and one can no longer talk about ‘markets’ in general terms, it is down to the mix of companies within indices/markets/portfolios. The US market has (rightly) benefitted from its heavy weighting in major technology-related companies (Apple, Microsoft, Amazon, Alphabet, Facebook etc.), who are likely to see little earnings damage or gains, the UK market has a different profile.