Here we go again, another Friday in lockdown; although the fantastic weather has certainly been welcome. So, celebrate the heralding of the weekend with this week’s News, Views and Truths.
This week has been more “risk-off” than recent, although that has been tempered by a governmental intervention which seems to be the story of the market recovery to date; I’m reluctant to say a broad economic recovery as that is yet to be seen.
Despite many believing that the pandemic is over, it’s plainly not, with a significant rise in infection rates across the globe. As countries loosen lockdown restrictions, the simple fact that the disease is still present gave the world a dose of reality this week and as expected, the market reacted negatively.
As I have written over past weeks, the markets are pricing in perfection and any news to the contrary will be met with a severe reaction. This week, the US recorded a one-day total of 34,700 new confirmed COVID-19 cases, the highest figure since late April, when the number was viewed as having peaked at 36,400, according to data compiled by Johns Hopkins University.
Over recent days, hospitalisations and infections have been resurgent in places like California, with more than 7,000 new cases as of Tuesday. Furthermore, in Arizona, identified infections jumped nearly 50% from a week earlier, representing the largest increase by any US state.
And it’s not just in the US. Australia’s second-most populous state deployed ambulances and mobile test centres in a coronavirus testing blitz as the country recorded the biggest daily rise in cases in two months. Victoria State recently said 33 people had tested positive for coronavirus in a 24 hour period, marking nine days of double-digit new cases. To put this into context, it has around 200 current cases out of the country’s total of 270.
Closer to home, Germany has been forced back into lockdown after an outbreak at an abattoir. More than 1,500 people from the Toennies plant in Gütersloh district tested positive for the virus, which resulted in the immediate closure of schools and childcare centres. Gyms, bars and cinemas will shut again, but restaurants will remain open to serve members of the same family. The localised lockdown comes after the country’s R number rocketed to 2.88, meaning the virus is thought to be spreading exponentially.
All of this resulted in a significant market sell-off on Wednesday, with the FTSE 100 ending the day down 3.07% and the US S&P 500 coming off 2.57%. And the fear was palpable; market commentators were firmly planted on the “I told you so” side of the argument, even though only days before they were heralding the start of a new V-shaped recovery; more flip flops than on Seaburn front.
Yet the ‘Powers That Be’ were spooked and as a direct response to this, the US Federal financial regulators announced they plan to make it easier to let banks invest in venture capital funds and also to relax some limitations on derivatives trading. The moves, essentially a loosening of some of the more onerous parts of the so-called Volcker Rule, subsequently lifted stocks.
The Volcker Rule, part of the broader Dodd-Frank bill enacted in 2010 following the meltdown of big banks in 2008, sought to crack down on risky behaviour by Wall Street firms and was named after former Federal Reserve chair Paul Volcker, who passed away in December.
The Federal Deposit Insurance Corporation (FDIC) along with the Federal Reserve, Office of the Comptroller of the Currency, Securities and Exchange Commission, and Commodity Futures Trading Commission, said that it was issuing a new rule to modify and clarify some of these restrictions.
The regulators said that the changes will allow banks to “allocate resources to a more diverse array of long-term investments in a broader range of geographic areas, industries, and sectors than they may be able to access directly”.
The new rules are estimated to potentially free up as much as $40 billion for the big banks and naturally, the banks welcomed this. “We welcome the measured steps taken today by the FDIC, which will allow banks to further support the economy at this challenging time for the nation”, said Rob Nichols, president and CEO of the American Bankers Association in a statement.
And this was all before the Fed announced the results of its annual bank stress test, given more importance this year due to the backdrop of the global pandemic. The results showed some banks could get close to minimum capital levels in scenarios related to the coronavirus pandemic and as a result of this, banks must suspend share repurchase programs and keep dividend payments at current levels for the third quarter.
“While I expect banks will continue to manage their capital actions and liquidity risk prudently, and in support of the real economy, there is material uncertainty about the trajectory for the economic recovery”, Fed Vice Chair Randall Quarles said in a statement.
The announcement sent some bank shares lower in after-hours trading. Bank of America and JPMorgan Chase both dipped more than 1.8%. Wells Fargo slid 3% and Goldman Sachs fell 3.4%. However, bank stocks were coming off sharp gains, rallying more than 3% during regular trading on Thursday.
So, I’d suggest the moral of this week’s story is do not expect perfection as that will only lead to disappointment. The environment will continue to be challenging and the market returns are not linear as many expect. However, we are currently in an age of huge technological innovation and the opportunities are there for those with a longer investment timeframe and the ability to ignore short term fluctuation. It is both fantastically exciting and hugely worrying.
But that’s investing for you. No one said it was easy.
As with previous weeks, this blog is available in podcast form and can be found on all usual podcast platforms; if you do not have one, listen to it here and you can also catch up on the previous episodes if you haven’t listened to them already. And don’t be afraid to send this link to anyone you think may be interested in listening…
This week’s “When Andrew Met…” video is now live on the website and this week has one of the UK’s foremost equity income investors, Colin Morton, who manages both the Franklin Equity Income and the UK Rising Dividends funds. With UK equity dividends coming under much pressure due to the current economic backdrop, Colin gives his views on the sector and what income investors can expect moving into the future. You can watch this here.
Stay safe, stay sane and I will see you all next week.
The content of the above blog is for information purposes only and does not constitute advice. If you do not understand any of the content, we would recommend that you seek professional financial advice.
