15th June 2020
Stock markets suffer altitude sickness
Reading the news seems much more complicated these days. Our friend and old colleague, Rob Martorana,
has lived and worked in New York all his life. An excellent portfolio manager and great thinker about
investments, Rob has written a series of articles for the Chartered Financial Analyst group1
about how to digest news in a way that takes account of its underlying biases. The easy way to do this is to pick a sample
from media sources with known biases to judge the central case and the range of interpretations.
The difficulty occurs when those media biases change. This has happened in recent years and particularly
recent weeks, with opinions generally becoming more pronounced and polarised. But when events are
momentous, those biases can fluctuate and be difficult to judge.
Are markets unhappy that the Fed isn’t happy?
In a move that surprised no one, the US Federal Reserve (Fed) announced last week that it will leave
interest rates unchanged. The Fed funds rate will remain in the 0-0.25% range, keeping financial conditions
easy as the US economy slowly opens up again. To add even more liquidity into the system, the Fed
promised to maintain its asset purchase program, buying $80 billion worth of US Treasury bonds a month,
as well as $40 billion of mortgage-backed securities. The Fed keeps buying at high levels of volume, but this
is nevertheless a slowing of the pace compared to the beginning of the pandemic.
The headline-grabbing news, however, came not from what the Fed did, but what it said. According to the
“dot plot” (which shows where Fed members expect interest rates to be over the next few years and
beyond) it expects interest rates to remain at near-zero levels until the end of 2022 – an announcement
that the media took as a Fed vote of no confidence in the US economy. The Financial Times called it “a dire
assessment of US economic prospects” and blamed falling global equity markets on the Fed’s dour outlook.
The S&P 500 fell almost 6% by close on Thursday, while both UK and European markets saw daily falls of
around 3%. In terms of actual outlook, the Fed expects a 6.5% fall in US GDP this year, but sees activity
bouncing back somewhat to 5% growth next year.
EM or EU? Where to go when the world opens up
As we wrote last week, the deepening of this global recession has, over the past couple of months, been
met with an ongoing rally in equity markets. This growing disconnect may look a little perplexing, but
broadly speaking there are two overarching reasons behind it. Ultimately, we know this crisis will pass
without totally destroying the global economy. What’s more, governments and central banks are
committed to filling the gap with capital in the meantime. These factors have changed the market mindset
from ‘should I invest?’ to ‘where should I invest?’ As such, one of the biggest questions facing investment
professionals is: Where should I go to make the most of the global recovery?