SHOULD WE BELIEVE THIS RALLY AGAINST A BACKDROP OF IMPONDERABLE ISSUES?

March 31, 2020

Market machinations never cease to amaze me. Last week saw that extraordinary three-day stock market rally in the US and Europe – DJIA up by 21% and the FTSE 100 up by 16.5%. Yet the economic data, though much of it temporary, is dire – unemployment forecasts from respected economist suggesting 8.5% in the UK by July. Then the St Louis FED is of the opinion than 47 million Americans could lose their jobs in the second quarter amid the coronavirus pandemic, sending the unemployment rate to 32%. If that is not enough, many believe that Germany’s economy (GDP) could go in to reverse by 20% in the second quarter and the UK by maybe as much as 25% in the same period.

Clearly, there is this school of thought that is of the opinion that once the testing on the virus has been done (say two months), the world may be forced to go back to work to save the world’s economy from dying irrevocably on its feet for generations. I have spoken to people in New York, who believe that many Americans will tolerate this economic meltdown for a certain period – but not for as long a period as the WHO/health gurus may want. Without being callous, in their opinion, if a few extra older people die from this horrendous virus; so be it; they have had a good innings and the fit and young haven’t yet had a decent cut at it. Sounds appalling, but I get the drift. Certainly, President Trump is more than cognisant of getting the US back to work, as he knows that he has no chance of being re-elected, if the economy is on the blink or the stock market is heading south. He’s also probably calculated that if the death toll from coronavirus is no less than normal flu in the US in a year, that may be acceptable to the electorate

So yesterday, many thought equity geeks would take profits. However, once JP Morgan Chase expressed the opinion that the truck should be backed up quietly to take a few more stocks on board, sentiment changed markedly. The reasons given were that market stabilisation and revival have largely been met, with recession-like pricing, a reversal in investor positioning, coupled with extraordinary and essential fiscal stimulus. Some may think this brazen comment a little premature, but there is certainly an appetite to embrace it. The next month, I believe, will tell us the basics of what we need to know.

In closing, a comment on the behaviour of the banking sector and dividend payments in general. Having been given a freer rein than normal by the Bank of England and the FCA, the UK banks have been given a heaven-sent opportunity of rebuilding their tarnished reputations post the credit crisis in 2008. However, to date they do not appear to have warmed to the task that well, with Lloyds and Barclays for example supposedly blocking many attempts by smaller businesses, including those involved in travel from access to the government’s relief schemes in Chancellor Sunak’s £330 billion rescue package. Of course, it takes time to get these packages to the end user, such is the demand. Also, banks will use the understandable excuse that they do not want to lend money to those who may be unable to repay these debts. Banks may collect as much as £15 billion in bad debts in the months to come. The total bank lending stands at $3.2 trillion.

The ECB and the Bank of England seem determined that banks should cut or stop dividends and bonuses, with a view to restoring strong capital bases. Barclays is due to distribute a £1 billion dividend this week and all UK banks pay out about £15 billion worth of dividends in a year – a not inconsiderable amount of largesse. In passing, BP and Shell paid $18.3 billion in dividends last year.  That figure is likely to be cut substantially this year to shore up gargantuan debt.

Food for thought!

David Buik, 31st March 2020