New article from Tatton Investment Management: Extraordinary: bear and bull market all in one

30 March 2020

It is the era of superlatives, the most frequent being “unprecedented”. The term is unavoidable and, I suspect, carries a level of unease only comparable to what many of our grandparents must have felt following the declarations of war that heralded World War II. Except that the state of emergency we find ourselves in now is far harder to grasp than a conventional conflict situation.

Perhaps this is why this month stock, bond, currency, commodity and all other traded asset markets which in aggregate we refer to a capital markets have displayed quite extraordinary dynamics. The week’s headline is that over the course of March 2020 we experienced both bear market conditions due to falls in excess of 20%, but also bull market conditions with some stock markets this week rising in excess of 20% over three successive days of recovery. On Friday the rebound ended, and the week’s recovery now looks very much like the sort of short-term bounce common during bear market periods. For more on the subject of bear market dynamics, please look at the article in the downloadable document titled: ‘The anatomy of a bear market’

Despite the extraordinary events of this week, history will remember the last week of March 2020 for different reasons. For the UK public the (soft) lockdown came in force and 10 Downing Street (including our Prime Minister) had to quarantine itself as well. From an economic perspective, since last week’s update we have experienced governments and central banks taking pretty precisely the action we had outlined. Policymakers are doing their best to quell the worst of existential fears spreading through businesses and households, while hospital staff around the world are fast becoming the unintended heroes of the 2020 coronavirus crisis.  

While most people will have found their daily lives have deteriorated significantly over the week, that was not the case from the perception of the economy at large and by extension capital markets. The reason for this is that central banks have enforced sufficiently effective monetary intervention measures to prevent the virus crisis triggering another financial crisis. Governments meanwhile announced sufficiently large economic support programs to create the hope and expectation that the economy – and households – will emerge from the current lockdown reasonably intact, and ready to carry on more or less were they were before entering into hibernation.

This has put a floor (or safety net, if you like) under capital markets, with most participants no longer having to assume that the saving of thousands of human lives will come at the expense of a global depression – at least as long as the economic hibernation does not carry on indefinitely.

For those who think further ahead, and wonder where this may all lead to, it was a week of intense reflection about and a revisiting of economic principles of both monetary and fiscal intervention, monetarisation of government debt through central banks, moral hazard and potential lack thereof. All the while also learning and searching about new insights on the spread and impact of COVID?19, given that the actual turn in fortunes of this recession and bear market will only come about when we can identify the likely end of the pandemic.

As a result of all this, we dedicate one article this week on providing an overview of all the measures that have been announced, and another on how it all works under the title “Governments and central banks make sure the big wheel keeps on turning”. This is followed by an insight into how we are affording the measures taken and an assessment of the likely medium to longer term consequences of the absolutely necessary actions of the coming weeks in the article; “How do we pay for all the fiscal support?”      

The ultimate learning of the week, however, was made by those investors who had thrown their long-term investment plans and beliefs overboard and encashed their portfolios last week or on Monday in a bout of panic and apocalyptic vision. We were very relieved to observe that there were very, very few among our portfolio holders, and we would hope that our unrelenting flow of updates and insights – together with the highly-skilled advisers we work with – contributed to this. However, the rapid 20% recovery evidenced our point that unless investors have some innate ability to know when the bottom of a bear market is reached, then converting their holdings into cash is of not much use. The recovery is likely to happen so unexpected and vehemently that most will miss it, leaving those outside of the market nursing crystallised losses, while those who stayed put will find themselves rewarded for their patience.

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