The year that has been
15 Jul 2020
The first half of 2020 was certainly something we have not seen before. The US entered 2020 on strong footing, Europe was still in an extended go slow, China was going along reasonably and Australia was picking up a little as well. Some were starting to feel we would start to get some synchronised global growth and away from the Central Bank support that has been a feature since the GFC.
Then Covid19 appeared and the world was thrown into turmoil. Everything was impacted and almost every assumption no longer held.
We could try to give you an explanation of the market movements over the last few months. It would include a discussion about liquidity injections, massive policy action, or other intelligent sounding explanations you might like. However, in the real-world time moves forward and an uncertain world looks very different from a hindsight perspective. Investors act as a crowd and the crowd does not behave in a consistent way. It depends where the focus is and the stories they tell.
The global pandemic led to government responses which caused unheard of economic disruption and the fastest collapse in stock prices ever.
This was followed by the largest policy stimulus ever seen and a partial rebound in share prices.
Despite the severe declines in economic activity and a complete failure in the attempts to stop the spread of the virus (for most of the world), the US market has recovered a big part of the losses, and Australia has rebounded well.
You can easily see the impact at the stock level with certain sectors such as banks still well down, as well as severely impacted industries such as oil, and of course anything travel related. Quality has risen to the top. The US has done much better than Australia largely because it has some extremely strong, high quality businesses in the technology sector, whereas in the Australian market, the banks are the cornerstone of the equity market.
We hear many investment wisdoms intended to make you buy low and sell high. Do not panic, buy when there is blood on the streets or sell when the Uber driver is giving you stock tips (this was once the Bell Hop and formerly the taxi driver!).
In reality, in the heat of the moment and without the benefit of hindsight, it is certainly not so simple.
So, who was the crazy investor this year?
Those that sold when all we knew was the virus was spreading and we had to shut the world down? For anyone who understands business and economics, who listened to the government and health authorities, it would have been reasonable to be very concerned that we would have an economic and financial meltdown. In fact, without making any further assumptions, disaster was close to a certainty.
Then the Central Banks and governments took unprecedented action, which blew away any previous action they had taken only a decade ago in the GFC. Policy makers went all in to provide a backstop. It seemed reasonable to buy the market on this, but even if you thought that was the best action to take, would you have had enough faith that the government would do what needed to be done?
Confidence in governments had rarely been lower and we have seen populist politics, bickering and paralysis for many years. We have the state and federal governments both making crucial decisions.
If you understood the mathematics of the virus, the only obvious prediction you could make was that when they loosened the lockdown, it was going to spread again. You would have looked at increases in the markets and thought everyone was crazy.
However, you would also have needed to know that public opinion and government policy priorities would completely flip. As the major economic impact of the virus was the government shutdowns, not the virus itself, the continued spread was less of a concern from an economic perspective if they reopened the economies.
It appeared clear that going back into lockdown again and again was not an intelligent policy. It causes maximum economic damage and unless you have a vaccine or very effective treatment around the corner, you are just kicking the can down the road.
It appears that no group stands out as emotional fools. It was not about irrational fear or crazy greed. It was about huge uncertainty.
If you had low quality investments, there were times you could have reasonably feared complete bankruptcy, and many may still go down a path that leads to irrecoverable losses.
With a well-developed investment strategy, appropriate to your situation and built to withstand economic shocks, you can remain calm in such times and you are not forced to make flip-of-the-coin decisions that will drastically impact on your future.
The tale of the Three Little Pigs is about taking the effort to build a house that can withstand the huff and puff of the Big Bad Wolf, wherever he comes buy. If you build with sticks or straw, you better cross your fingers and hope the wolf does not come by.
If you have any questions please don’t hesitate to ring the office to speak to an adviser.