Downside protection amid 'gloomy economists' and irrational markets
While coming within a whisker of calling the low for the S&P 500, it is fruitless attempting to call short-term market moves.
Frankly, they could go anywhere in such an emotional climate, as witnessed in the oil market.
Some expensive markets (practically all sovereign debt, notably that with any duration) have become even more expensive, while others, such as investment grade, which had flipped to looking cheap again, are not so clearly cheap now after a 30% rally.
Stockmarkets did appear to be settling into a more rational frame of mind over the past few weeks with a rather clearer focus on the long-term winners and losers from the current crisis.
Pandemics, panics and perspectives: Investor psychology amid the Covid-19 crisis
Economists are sounding gloomy and the IMF has recently declared that the Great Lockdown Recession will likely be worse than the Great Depression; although in reality they are as much in the dark as the rest of us.
What we are seeing is some colossal dispersion in ratings and performance of the various sectors and stocks.
Obvious examples include Amazon, which is now up by 25% over the year, and Netflix, up by 34%. Exxon Mobil Corp and Wells Fargo have fallen by 40% and 50% respectively.
The collapse in the oil price has been widely reported. Increasing production at a time when demand was shrinking rapidly appears to have been a colossal tactical error by Saudi Arabia (unless their aim was the destruction of the US shale oil industry).
The late addition of the realisation that short-dated oil contract prices could go negative - combined with more disarray in ETFs - triggered panic.
Credit markets (re)opened for business in the latter part of March, encouraged by the strenuous efforts of the US Federal Reserve, the European Central Bank and other central banks. Credit spreads found support around the same time and corporates are able to raise funds, a significant comfort for equity markets.
The Federal Reserve and capital markets have stabilised and are functioning. There are still stresses and strains but, collectively, the central bank and government programmes enacted have produced an environment in which companies can refinance.
The 'risk-free' 10-year gilt yield has stabilised around 30 basis points and the US around 60 basis points.
James Mahon is co-manager of the Church House Tenax Absolute Return Strategies fund
Bull Points
• Central bank action is a huge comfort for equity markets as companies can now refinance
• UK and US 10-year gilt yield has stabilised
Bear Points
• Already expensive markets such as sovereign debt have become even more expensive
• Collapse of oil price has caused more panic across markets
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