Who would have thought some three months ago – when coronavirus suddenly became a global issue, share prices went into free fall and the world went into lockdown – that stock markets would have recovered all their losses in time for the summer solstice this Saturday?
Hands up. Yes or no? Certainly not me. Indeed, if someone had made such a bold forecast back in late March, I would have assumed that ‘eternal’ and ‘optimism’ were their second and third Christian names.
Yet, ladies and gentlemen, that is where we are.
Despite the fact that some 8.9m workers have been furloughed in the UK in response to coronavirus – one in four workers – and unemployment in the US is a staggering 13 per cent, the stock market has been in buoyant mood. Not just here, but also in the US and in other parts of the world.
The government will do all it can to shock the economy back into life with a series of stimulatory measuresOf course, stock markets look forward, so it is understandable they are taking a view that echoes the lyrics of D:Ream’s 1994 hit “Things Can Only Get Better” (a tune, you will remember, that was used by Labour in the run up to the 1997 general election).
Yet, here in the UK, it is unlikely that any economic recovery is going to be swift and v-shaped.
Although coronavirus may be under control for the time being and those shops that have survived economic lockdown are now reopening, I imagine things are going to remain grim for a while before getting better.
Unemployment will rise to levels not seen since the days of Thatcherism and de-industrialisation in the 1980s, while some good companies (sadly) will startle us by going out of business. Others will struggle to adapt to a world where coronavirus-related restrictions still apply.
Of course, the government will do all it can to shock the economy back into life with a series of stimulatory measures – for example, infrastructure spending and maybe employer national insurance cuts. But it faces an uphill battle.
Economic shrinkage looms, as does recession. D:Ream re-release 2020: ‘Things Can Only Get Worse Before Getting Better’.
It is hard to disagree with Jeremy Grantham, co-founder of investment house GMO, on economies and stock markets. Earlier this month, he talked of a big disconnect between the stock market and the economy.
Although his comments were about the US, they are valid here in the UK and should be heeded by all with an interest in the stock market (wealth managers, financial advisers and investors).
Mr Grantham, an investment veteran, said: “We are in the top 10 per cent of historical price-earnings ratios for the S&P [index] on prior earnings, and simultaneously are in the worst 10 per cent of economic situations, arguably even the worst one per cent.”
His conclusion? To quote him verbatim: “The current market seems lost in one-sided optimism when prudence and patience seems much more appropriate.”
So, what should investors do? It is a difficult question. When stock markets started to implode in response to the coronavirus pandemic earlier this year, I urged investors (in the pages of The Mail on Sunday) to keep their nerve, ensure their portfolios were broadly diversified, and focus on the long term.
Such advice has been proven to be right, although I cannot say I felt good about giving it when on March 23 the FTSE 100 hit rock bottom.
It is advice that still applies today, although I am firmly in the Grantham camp when it comes to prudence.
I certainly would not be advising investors to throw big money at the market right now. Monthly patient investing is the requirement of the moment, as is a long-term investment horizon.
What is more obvious than where the stock market goes from here in the short term is the changing nature of the investment landscape.
Coronavirus and economic lockdown have catapulted digitalisation into all of our front rooms. Zoom, Slack and Netflix are now as much part of our lives as the likes of Amazon, Google (Alphabet) and Facebook.
These companies – for better or for worse – are here to stay and it is obvious that rampant digitalisation is going to disrupt the business status quo even more.
Companies that are not prepared to innovate and embrace new technology are either going to wither on the vine or go out of business. Remember Kodak and its failure to adapt to a digital world, leading to it filing for bankruptcy in 2012?
Well, according to Tom Fitzgerald, a fund manager with EdenTree, there are plenty more “Kodak moments” just waiting to happen.
Innovative, technology embracing companies will be the stock market winners of the future – irrespective of what happens to equities in the short term.
Jeff Prestridge is personal finance editor of The Mail on Sunday
