I will focus this week’s commentary on some of the observations and lessons I have learned from over the years either directly or by watching other portfolio managers responses to circumstances as they arrive.
We have now hit US earnings reporting season. Each quarter, US corporations report their prosperity and allow analysts to determine if they are on target to achieve annual expectations. The reason why quarterly earnings are so important is that they have a very high directional correlation with the general stock market.
2019 was a surprisingly strong year for both equity and bond investors and a measure of complacency entered markets. This was evidenced between October 2019 and February 2020 when equity market volatility declined despite global equity markets rising by ~13.5% to new all-time highs.
Based on evidence embraced by us early in the year, COVID-19 was presumed to be an uncontrollably infectious disease, likely to spread around the globe bringing human endeavour to its knees with a very high mortality rate.
The first quarter of 2020 started strongly. By 20th February the S&P500 had risen 5.0% and market volatility was extremely low. Complacency was creeping into investors thought processes and the markets were coming off an unexpectedly strong 2019.
July has seen a continuation of the recovery in equity markets. The US equity market increased +5.64% in July and Europe declined -0.87%. Our global equity strategy again produced attractive returns, appreciating +5.52% during the month. The key to successful investing in 2020 has been avoiding those companies impacted by the current economic turmoil caused by Covid-19.
The unpredictable nature of markets constantly surprises. There can have been few commentators at the end of the first quarter that would have predicted the revival we have witnessed between March and June 2020.
Concerns over valuations and disappointing economic data were overlooked as ‘FOMO’ gripped markets – it is becoming challenging to buy certain stocks as stretched technicals and narrowing market breadth point to another period of complacency.