There’s been relatively good economic data coming out especially on US unemployment statistics. Enthusiasm for the gradual reopening of economies worldwide plus unprecedented government stimulus has also led to a resurgence in risk taking appetite among investors.
The momentum for the recent stock market rally has been strong, and the S&P 500 has crossed its 200 day moving average, a traditional signal of a long-term uptrend.
The European Central Bank has also agreed to spend an extra 600 billion Euros on emergency bond purchases, ramping up stimulus efforts to help the eurozone weather the coronavirus crisis.
With this crazy amount of stimulus, monetary easing and supportive government policies, we should see interest rates remaining low for a while. To recap, following the 2008-2009 financial crisis, interest rates hovered at or near 0% for close to 7 years.
Investors will now struggle to find yield – REITs, stocks, high yield bonds will be poised to do well in this low rate environment with cost of financing this low.
Cash should always remain as a cushion (in bad times, cash is always king). But holding too much cash will have negative expected returns in the long run due to inflation. Aside from keeping a small amount of cash as emergency funds, enough to make you feel at ease, investing your extra cash should lead to much higher returns over the next decade.
Just take a look at the S&P 500 since 2008 – it’s a monstrous rally.
The Singapore stock index, tracking the largest 30 stocks listed on the SGX by market capitalisation, has also seen some recovery. It hasn’t seen the full breadth of the recovery yet, largely because the S&P 500 has many technology stocks in the index which were less impacted leading the rally.
We are now roughly 15% off the levels seen earlier this year, and we can expect a quick recovery towards that level as the situation stablises and earnings outlook remain positive. I think with the amount of government support, furloughs and pay cuts to conserve cash, that is a likely outcome.
UOB announced that it has managed to retain its dividend policy despite the pandemic.
Going forward, in the absence of second and third waves of infections, a sustained recovery should be on the way and we should be able to avoid lockdowns of this magnitude. However, I believe that certain sectors of the economy will still feel the pinch from the tighter regulations on preventing virus spread – these sectors include aviation, entertainment, construction, retail, and F&B.
Until a vaccine emerges, which should be some time late this year or early next year, I think the outperformance of technology stocks (and indices with heavy tilts towards technology) will continue. In the future, I am increasingly optimistic about healthcare, biomedical, communication services and technology sectors as societies recalibrate their priorities.
The changing consumer preferences, new business norms and shifts in government priorities during this temporary reset will have a profound impact in the years to come.
Despite the rapid recovery, risks still remain in geopolitical tensions, civil unrest (e.g. in the US and in Hong Kong), trade tensions, North Korea, and the unknown unknowns.
Investment lessons learnt from the pandemic?
Stay invested, hold some cash, don’t panic sell, don’t chase a falling knife, don’t start buying too early during a crash, size your averaging-in strategy and more.
I might write a post about it next time — till then, stay safe and obviously, stay invested.