Market Update – 23rd September 2020.

The end of our summer unfortunately coincided with a sharp fall in global equity markets.  However, just because autumn is now upon us, doesn’t mean equities aren’t attractive or that we are due another period of weakness – as we do not believe that this week’s declines are the start of a deeper equity market correction or a return to those dark days in February and March this year:  it was simply a normal short-term pull-back.

While it would be very easy to simply blame this weakness on the coronavirus, given it continues to dominate the news, it would be wrong.  In fact, the resurgence in US infection cases over the summer didn’t stop US equity markets from rising.

We can’t deny that the coronavirus is a bugbear, or argue that new coronavirus lockdown restrictions are positive, as additional restrictions are obviously unhelpful as they are likely to reduce consumer spending (the consumer accounts for over 60% of the UK economy), but we do not believe that they will put a stop to the current economic recovery – only merely slow the current ‘V-shaped’ recovery to one looking more like a ‘Nike swoosh’.

Besides, we believe that the BoE will now have no choice but to cut interest rates to below zero – as Boris Johnson said in last night’s address to us, “a stitch in time saves nine”.  And further cuts in interest rates are positive, as a loose monetary policy has been, and will continue to be, very supportive for equity markets.

What has spooked equity markets this week was the death of US Supreme Court Justice Ruth Bader Ginsburg, as this has added to the risk in Washington.  Not only do we have the US Presidential election on 3 November 2020 (which has all the hallmarks of being contentious), but we also have a political stand-off between Republicans and Democrats over a new fiscal stimulus package to help those American workers that have been hard-hit by the coronavirus outbreak and associated lockdowns – and the death of Ruth Bader Ginsburg further reduces the chances of the two sides agreeing any new stimulus ahead of the election, which could slow the US economic recovery.

Furthermore, California, Texas and Florida are three key US states, which together account for nearly 30% of the US economy and they are all being negatively impacted by natural disasters:  California, is the largest economy in the US (it’s economy is actually bigger than that of the UK) and is struggling to contain dozens of wildfires; while Texas and Florida, the second and fourth largest GDP contributors, are in the midst of an unusually intense hurricane season with an unprecedented number of cyclones – which could also slow the US economic recovery.

Although we appreciate that this equity market weakness is unnerving, we don’t believe long-term investors need to be overly worried.  As we have previously warned, the path for equity markets is never smooth – that is why my wealth takes a long-term approach to investing, as evidence shows that this leads to better performance as time in the market is more important than trying to time the market.

Therefore it is very important to maintain a long-term perspective and resist the urge for any knee-jerk reactions.  There will always be periods of market uncertainty and volatility and this current period (which could last until the results of the US Presidential election are known) is no different.

Moreover, our long-term growth portfolios are diversified across a variety of asset classes (equities, fixed interest and cash) and geographies, such as Europe, Asia and the US; and we have a disciplined investment process.  Although that hasn’t unfortunately stopped client portfolios from falling in value since the start of the year, it has helped to protect against bigger losses.  For example, since 31 December 2019, the FTSE-100 has fallen 22.71%, while over the same period a typical my wealth Cautious portfolio is down 3.49%; Balanced -9.44%; and Adventurous -5.69%.

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