Broomer's Blog

Outlook September 2020

Covid continues to dominate the news headlines, however, global stock markets, led by the US and the NASDAQ index, have continued to climb higher over the summer months. Economies around the world have reopened from lockdowns and activity has picked up strongly over the summer months. Government bond markets have largely traded sideways as central bank buying continues to support record low yields. Credit markets too have benefited from central bank action and yields have continued to compress. Despite the viciousness of the recession, defaults seem set to be significantly lower than feared in March.

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Outlook June 2020

The recent moves in the markets have been astonishing, both the collapse and the subsequent recovery. The accelerated pace of this cycle has caused this to be a very challenging period to be managing money. The economy has taken an enormous hit, yet we are pleasantly surprised to find the S&P 500 nudging back into positive territory for the year. Markets have recouped their losses due to aggressive monetary and fiscal responses and the gradual emergence of the main global economies from their shutdowns. However, a myriad of uncertainties and risks remain.

The economic numbers have been derailed so badly that it is impossible to make sense of them. For instance, the improvement in the US jobs report on Friday was much better than economists had been expecting. The BLS, which generates the report, acknowledges difficulties in collecting data during the crisis. Nevertheless, the markets leapt on the announcement which underlines what we already knew; the US is reopening its economy.

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Why are companies cutting dividends?

Dividends are normally a reliable indicator of company health. Most of the time, dividends are paid, and are only cut in the direst of circumstances. Company shares frequently suffer very badly when this happens and so during most market crises dividends across the market are very rarely reduced. To put this into context, in 2008 they fell by about 10%, which by historical standards was an exceptional fall.

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Have markets got ahead of themselves?

We find ourselves in the midst of a striking rally in the S&P 500 which has retraced 27% since the market lows on the 23rd of March, regaining over half the losses since its peak in February. The FTSE 100 has been more pedestrian in comparison being only up 13% from its lowest point. The US government has been busy pulling together packages to help prop up businesses. Congress has released $2 trillion to help individuals and businesses directly affected by the virus and the Fed more recently has created a $2.2 trillion bundle of loans and liquidity support to help markets and businesses through these difficult times. We are now entering the first quarter earnings season, but most investors will be expecting widespread bad news which will largely be ignored by the market. One development that seems to be supporting the market at the moment are signs that the epidemic is being suppressed. We are perhaps passing the worst here in Europe while the US appears to be approaching the peak of this outbreak. Ho ...

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How is the economy going to bounceback?

Markets continue to be amazingly volatile with the S&P climbing 7% on Monday this week. In general, we do not expect to see market changes of that magnitude in a bull market; they are much more associated with bear markets and we are probably not out of the woods yet. In addition, we are facing a material collapse in GDP as large swathes of the economy are closed down. We are beginning to consider the extent of any bounce-back once these controls are lifted. It is perhaps easiest to put these considerations in the context of individual businesses. Take for example hairdressers. The longer people are confined to their homes, the more dishevelled they will start to look. Hairdressers have lost custom as their clients are prevented from going to salons but once the quarantine restrictions are lifted, people are likely to rush back, and hairdressers can expect to experience a surge in demand as a result. Nonetheless, the longer the lockdown remains in place, the more business hairdressers will miss out on. Th ...

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How the Global Financial System is plumbed and the strains that it is under

We have seen some strange moves in financial markets over the last two weeks. The dollar has slumped, then soared. Governments have basically underwritten corporate credits yet credit spreads have widened out to levels not seen since the GFC. Gold prices tumbled by 10% and are now climbing once again. Government bond prices have swung wildly, gilt prices slumped by over 10% at one stage. What is going on? Below are 10 observations: 1. Adverts: Watching TV over the weekend, it is almost comical to watch adverts for cruise holidays and to see offers for two frozen pizzas for £5 – as if supermarkets have any left in stock. However, this underlines how rapidly the situation is moving. This crisis has not developed in weeks, but in days. The global financial system is struggling to deal with the speed and magnitude of the changes.. 2. Loo rolls: Are we not using the same amount? Admittedly wholesale supplies (offices, restaurants etc) now need to be redirected through the retail system and t ...

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Coronavirus: how long will the disruption last?

Last week, global stock markets endured their worst trading since the 1987 crash. On Thursday alone, the FTSE 100 fell by 10% and the index has slumped by over 31% so far this year. Is this as bad as 2008? Certainly, the speed of the market adjustment is beginning to feel like the nadir of that crisis. However, in distance travelled global markets are only off 20-30% compared to the 40-45% falls in ’08. What is very different is that the financial system is not at risk. The main costs of this outbreak will fall upon governments and business will face a period of disruption. The key question is how long this period of disruption will last and markets are likely to become more settled once this is determined. Action against the outbreak is being moved to one of managing and slowing rather than elimination. Isolating and suppressing outbreaks involves very significant economic costs that largely fall on businesses. Managing and mitigating will also have costs but these will be largely borne by what is ...

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Outlook March 2020

It is becoming increasingly apparent that this virus, while serious, is not as deadly as some of the early figures suggested, as many cases seem to have gone unreported. Across the population the death rate is probably going to be around 1% for those infected. Whilst the haunting news of the death of the 34-year-old Li Wenliang, the whistleblowing doctor from Wuhan sticks vividly in our minds, this seems thankfully an exceptional case. This is a disease that predominantly takes the old and the sick. Though all age groups remain at risk, and many will require hospital treatment, 99% will pull through. The Koreans have been assiduous in their testing and identifying all those who have the virus. I am no virologist, but looking at the mortality rates there, I reckon someone in my age group (I turn 52 on Thursday) has approximately the same risk as dying from Covid-19 as any other disease or accident that might befall me over the course of the coming year. According to the website, UK men in the ...

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Coronavirus: markets taking the hit?

Stock markets around the world have plunged earlier this week as the coronavirus spreads. Over the weekend, large parts of Italy's industrial heartland were placed in quarantine and the oil price has slumped by 20%. The FTSE 100 has fallen by 6% on Monday morning. The virus has now infected people in over 50 countries and appears to be becoming established in several places. There have been successes in constraining its spread, however. A few weeks ago, new cases in China were measured in thousands each day. Now they are measured in the tens (44 to be precise). It would appear to be over optimistic to hope that the disease can be eliminated, and when outbreaks occur, the spread can be very rapid. This is increasingly looking like something that we must learn to live with. We have been a lucky generation. Our forefathers had to handle a host of epidemics such as smallpox, diphtheria, and cholera. Society continued then as it will do today. Covid-19 is nas ...

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Coronavirus: is the market’s reaction overblown?

Action to contain the new coronavirus, involving travel restrictions and quarantine areas, is economically damaging. Recent falls in stock market reflect this. We do not have full details of the disease and its severity but it is becoming increasingly clear that it is most dangerous to the elderly and infirm. Unusually, young children do not appear to be particularly susceptible and reported infections among the young appear surprisingly low. We have no wish to dismiss the human tragedy involved, but the groups most at threat are largely economically inactive. Health care services will come under pressure and care costs will be high, however, this burden will largely fall on the public sector. Taxes could consequently rise or, more likely, public borrowing will increase. Global central banks have cut interest rates to support the economy. This should help offset the damage wrought to supply chains and demand. Economists’ estimates of the costs of the virus range anywhere between 0.5% and 10% of G ...

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