Are investment markets showing the first green shoots or could there still be a late frost?
As I am writing this in my self-isolated home office on 1 st May 2020 it is currently 5 degrees outside
with very strong winds making the temperature feel more like minus 2 because of the wind chill.
Winter is coming. Here in the Southern Highlands of New South Wales we have quite cold winters, by Australian
Standards at least. We have regularly experienced actual temperatures of below minus 5 degrees,
and we have at times had snow falls, though not for a few years now. Frost is a regular occurrence.
By the time spring rolls around in late August and early September, we start to be tired of the cold.
The log fires and drawn curtains, the stylish overcoats and scarves, the opportunity to sit inside in
the warmth whilst looking outside at the wintry landscape starts to wear a little thin.
In our current COVID-19 imposed environment, it is beginning to feel a little bit like springtime.
Governments in Australia are starting to make noises about lifting some of the restrictions which
have been imposed on us, and there is talk that sometime reasonably soon we might be able to
return to the office. I think we are all looking forward to some real human contact again, rather than
over video links, however well the technology might have served us these past few weeks.
Investment markets have once again underlined a principle which I have written about before – “The
market always looks forward, it looks out the windscreen rather than in the rear vision mirror”.
Today’s news that France has moved into Recession will no doubt be reflected around the world.
How could this not be true when world economies have been so hard hit by an event the like of
which has not been seen for decades? Despite today’s news, the market is presently 20% higher
than it was on March 23, why is that?
Put simply, share prices represent what analysts believe a company will be worth in a few months; or
years; time. Prices for shares (or even for commodities) reflect the market participants expectations
of conditions in the future. Some very smart people analyse how a company is likely to perform
given expectations of future economic conditions. Whilst they do not have access to any kind of
working crystal ball (see here), as we don’t, they do have information which is not easily accessed by us mere
mortals. Because of this, the best guesses of financial experts (note they are guesses not prophecy)
of what the future looks like can be seen in the value of the stock market overall.
The issue, of course, is timing. No one can predict precisely when economic conditions will swing back
to positive, and to be honest, analysts don’t really care much. Their assessment of a company’s value
is based upon the likely cash flows to be received by owners of the company over the long-term. All
businesses experience fluctuations in their fortunes and some will thrive in one set of conditions
whilst others will perform best in an alternative set. Analysts assess what they believe a company
will achieve in terms of profits given what they think the future might look like more broadly. There
is obviously a lot of guessing going on here.
In terms of predictions, be assured that the value of the share market will increase from where it
stands today. When and by how much in the short term is anyone’s guess, but the following chart
shows how despite all sorts of shocks being thrown at it, the value of the market has always
increased, and I am certain that this time it is not different despite what some people might say.
This brings me back to springtime. Very often in early Spring we start to think Winter is behind us.
We put away the woolly jumpers (though to be honest never very far away, we have lived here for a
long time), we begin to think about letting the wood fire go out overnight, we might even start to
dream about barbecues and picnics. Inevitably, before Winter is truly gone, we will have a reversion
to the icy conditions we thought had passed. A late frost in September, October, or even November
is not all that unusual. The green shoots of Spring sometimes are set back by the last remnants of
Winter. It may be that the present recovery in investment markets is the same. We might see a
downturn again before the march onward and upward, wise investors are prepared for this.
This is why we say “When is the right time to sell? Never unless you must” see here. You should
certainly not react to short term market volatility. The current situation will end (I have no idea
when), the virus will be contained, businesses will re-open, profits will be generated. (some from
new enterprises, some from old) and markets will begin their upward march. (for more on this see