Markets remain in capricious mood. Violent changes in sentiment have become common as share prices react to the latest economic news or central banks’ comments. As lockdowns ease, investors are optimistic that a ‘v’ shaped recovery will ensue. To a degree, this will be self-fulfilling as enterprises open for business once more and a significant amount of deferred demand returns. However, such an immediate dramatic improvement will, in our estimation, be impossible to sustain due to the number of businesses that will not have survived the enforced shutdown. Furthermore, it is now clear that companies (large and small) are making redundancies. Lost jobs will obviously affect aggregate demand and therefore hamper recovery.
There is no doubt that governments and central banks are doing all they can to prevent what will be a severe recession, becoming a deep depression. Interest rates are virtually zero (and negative in some countries) while the policy of Quantitative Easing is in top gear almost everywhere. The world has developed an addiction to the latter which should have been kicked post the 2008 financial crisis but now appears unshakeable. There will be a price to pay for the deployment of such an unusual policy (some might say, profligate) but what has to happen will happen although when it will occur is another question entirely.
Stock markets are engines of prediction but never has it felt more like guesswork. We always try to let the hurly burly of the bourse pass us by because to our minds, it is far better to own good businesses for an indefinite period than get sucked in to behaviour that increasingly appears more at home in a casino. Despite the foggy outlook, that policy remains intact.