Into the Relapse Zone

AN INTERESTING THOUGHT Into the Relapse Zone - We are coming into the “Relapse Zone”, the period after restrictions are lifted - in particular, the market is interested in the experience in the US and UK. The world is watching to see if they have lifted lockdowns too quickly (as looks likely). You can track that on one of the many COVID-19 tracker sites. The Financial Times site is good. See chart of new cases below. As you’ll see in the chart – so far so good in the UK and US but it’s too early to judge with both countries only inching out of lockdowns at the moment. But here is an interesting thought, we have assumed it matters. What if a relapse doesn't matter to the markets. What if the US and UK have no intention of ever going back into lockdowns, whatever the recurrence. Trump is just the man to do it. His rhetoric has already addressed deaths as being a price you have to pay. Even if cases do rise the debate will start about what is more important, the economy or lives and we might just find the economy wins out. Second time around the economy might become the priority and the politicians may not listen so hard to the Medical advice. In which case a relapse might not matter. Lives lost might prove to be an ‘acceptable’ cost, a price that has to be paid. Maybe we’re worrying too much. There is already some evidence of recurrence from China, Germany, Iran and South Korea and the market doesn’t seem worried. The markets might be more resilient to a relapse than we think. Even if UK and US cases do recur, it might not surprise, it might be expected and tolerated. Just a thought - not a view - don't shoot the messenger. Still going sideways – Yesterday’s drop hasn’t popped us below the bottom of the sideways trading range. By no means. It will need a bit more than two bad days in the US to upset the trend and the 1.67% bounce overnight obviously reverses the sell-off today and takes the ‘precipitousness’ out of it. Onwards and sidewards. Sell signals – There are short term sell technical signals on the NASDAQ and the S&P 500 on a daily chart, not weekly. Don’t get too worried – This short term peak in the US market is not necessarily the pre-cursor to a precipitous new down-leg, although after the last two pivot points (the big sell and the big buy signals) you could be forgiven for thinking that it might be and exit, especially against the background of the corporate risk and economic air pocket we are in. Not every market pause means a crash is coming, every top and bottom is not a major pivot point. OK so the last two were...but they are rare moments. The odds are on this being breathing space, not a crash. Not everything is in a bubble - Whilst the headline markets might be bubbling again, there is plenty of opportunity - here are the sector performances in the US from the top. Energy, Financials, Industrials, Utilities and Materials are still well off the top. All those sectors are still down 20%, Energy 43%, Financial 33%. Things would have to get all out nasty (back into lockdowns) for these sectors to crater again. More likely they have seen the bottom and this is still a once in a decade buying opportunity. Small pick up in volatility - Volatility mildly picking up again: SUMMARY
  • Relapse may not be that bad.
  • Technology aside there are still a lot of sectors in the middle of a once in a decade buying opportunity.
  • Don’t see every moment of hesitation in the market as the start of a crash.
  • Volatility is inching up.
  • US markets are peaking in the short term.
  • Happy with the oil price bounce overnight.
  • Still debating whether to lose patience with the banks and play other stocks for recovery.
  • Iron ore companies are the ‘survivors’ – come a new bottom we’ll be getting overweight. Not yet.
  • Keeping an eye on the trade war news. It is not helpful but seems unlikely to crater the markets on its own as it almost did in 2019. Mid-COVID-19 the trade issue's market impact is more muted.
  • Still in 10-15% cash, seems appropriate as markets hesitate.
Footnote: A line from a fund manager in the AFR today - summarises the problem with 98% of the industry - "We think many retail investors have learned that it is very hard to time the market and that investing in equities requires a long-term view"

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