Macro Update - 18 May 2020

Virus numbers improve

Virus numbers improve – equities to follow suit: in his weekly Macro Update, Steven Bell talks us through an atrocious April, a more measured May, and the potential for positive profits by Q1 next year.


Virus numbers improve – equities to follow suit 

Equity markets have had their worst week since the lows in March and negative interest rates are garnering headlines. As Europe and the US cautiously ease their lockdowns, we consider what this all means for the economic recovery profile.


Last week a shocker for stocks

Last week was a bad week for stock markets. The S&P 500 was down a little over 2%, and the EuroStoxx fell nearly 5%. In sector terms, it was tech and healthcare that outperformed – no change there. The FTSE 100 fell by just over 2% but that owed much to the weakness in sterling. Indeed, in sterling terms, overseas markets, especially in the US and Asia, did not fare too badly over the week. All of this despite a good week for oil. Prices have risen strongly recently from very low levels – Brent has almost doubled since the lows last month – time to fill up your tank.


Virus numbers continue to improve

The virus numbers continue to improve globally. The growth in new cases and fatalities were both under 1% yesterday for the first time since the outbreak began. However, here in the UK the numbers don’t look so good. There’s more testing so we’re recording more new cases – the daily increase is running at around 1.5% compared with less than 0.5% in Germany, France, Italy and Spain. Fatalities are a better guide and here there is a slow and steady improvement, once we adjust for the weekend effect. The 7-day moving average for the UK shows deaths rising at 1.1% a day, down from 1.6% a week ago and 2.4% two weeks ago. By the end of the month, these numbers should fall below half a per cent.

The UK has some of the most detailed data on the breakdown of deaths from the virus. And the numbers are stark. The median age for fatalities is 80. 95% had an underlying heath condition. 26% of those who died had diabetes – compared with an incidence of 6% in the population overall. Out of 24,000 deaths, only 33 have been under 40 without an underlying health condition.


Atrocious April followed by a more measured May

Our view all along has been that April would be the month of the biggest economic contraction, May would see a stabilisation, albeit at a low level, followed by a gradual recovery over the subsequent months. That still looks to be the case.

Soft social distancing means that many activities, especially in the hard-hit service sector, are still way below normal. Another limiting factor is the need for consumers and businesses to rebuild their finances. Savings have been run down, debts have been run up. Both need to be restored to acceptable levels and that will limit spending. There has been much talk recently of the need for higher taxes next year, but we are not convinced. Governments don’t need to rein in their finances for a long while yet.


Profits predicted to be positive by Q1 next year

Goldman Sachs have updated their numbers on corporate profits. Profits for the S&P 500 fell by 14% in Q1 – the worst since the Global Financial Crisis. They are expected to show a 70% decline in Q2. Declines in earnings get progressively smaller for Q3 and Q4, and start to show increases in the first quarter of 2021. By the end of next year, we’re back to something like normality for aggregate profitability, even if some sectors are still depressed.

Much will depend on whether we get a second wave of infections, and a full recovery probably does require a vaccine. We won’t know we’ve got one until the testing has been done but there are expectations that there will be one next year.


More settled markets; equities should end the year higher

Markets are now much more settled after the recent volatility, and earnings downgrades are slowing.  I do think we’re in for a gradual recovery and I expect equity markets to be around 5% higher by year end. That may not seem much but it’s a lot more than you’d get from cash or bonds.

Steven Bell

Managing Director, Portfolio Manager & Chief Economist, Multi Asset Solutions


Risk Disclaimer

The value of investments and any income derived from them can go down as well as up and investors may not get back the original amount invested.

The information, opinions, estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time.

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