09 Jul Why summer might be unusually kind to stocks
Welcome to the latest fortnightly newsletter. This edition not only provides our now regular views on how the economy and markets are coping with COVID19, but in the second section, we consider some of the key issues emanating from Chancellor of the Exchequer, Rishi Sunak’s, mini-budget statement on Wednesday.
Why summer might be unusually kind to stocks
There is an often used adage in financial markets which many readers might have heard before….. ‘sell in May and go away’. This archaic axiom suggests investors cash in their investments in May and stay liquid until the autumn, mainly because ‘market-makers’ would be in the South of France, as a consequence trading volumes would be low and prices would not move by much. Whilst we do not subscribe to this strategy, and to be fair most wealth managers do not, there is an even more compelling reason for sitting tight this year. Once again we need to cross the Atlantic to look for the reason.
The US employment data are the most watched set of economic data since they are seen as the bell-weather for the world’s largest economy. They are also a particularly reliable gauge for economic health. At the start of the lockdown, markets took fright as millions of Americans filed for unemployment. Over the following weeks claimant numbers ballooned by 30m, easily eradicating the 22m jobs created since Donald Trump’s entry to the White House. Just as we have seen in the UK, many of these claimants had been sadly axed from sectors such as hospitality, leisure, travel and retail.
These are mind-boggling numbers but, whilst it might sound glib, the worst was probably not as bad as many feared. The most pessimistic estimates were that one on five Americans could be without a job. As it turned out, unemployment peaked at, a still grisly 15%, but the salient issue here is that the low point for the wider economy generally coincides with the worst of the employment data. In one of our earlier bulletins we argued that the stock market typically bottoms out about 3-6 months before the economy does so on the basis the economic picture (as painted by the employment data) was at its worst in April, it was perfectly conceivable, the low point for stock markets had passed.
As lockdowns have been relaxed, aggressively so in the US, firms have called back workers, much faster than anticipated, and this has had a positive impact on the employment numbers, with twelve consecutive weeks of improvement. The Federal Reserve (Fed) is still forecasting unemployment of 6% by the end of 2021 and we do not see anything approaching normalisation until 2023 at the earliest. There is no denying these numbers, along with other high frequency data such as airport checkpoints and fuel sales, point to at least green shoots of recovery.
Of course there have been concerns about the spike up in infections across the ‘sun belt’, states such as Arizona, Texas, Georgia and Florida. Whilst this undoubtedly makes people cautious, this can be at least partly be explained by increased testing. In April the US was testing 100,000 people per day, this number has since increased six-fold. What is evident is greater numbers testing positive but across a much lower average age, a group we know to experience milder symptoms, meaning whilst infections appear to have increased, mortality has dropped dramatically.
So does this help us answer the conundrum of whether to sell and go away? Let me answer this in two ways. The first is that following the global financial crisis, the Fed did not raise interest rates until 2015 (fully 6 years later), interestingly when unemployment dropped below the 5% level. With unemployment still expected to be around 9% by the end of this year, it is going to be a number of years before rates go up, on both sides of the Atlantic. Low rates are not good for cash investors but they are generally supportive for stocks. And bonds for that matter.
This leads to the second compelling reason. I would be first to acknowledge any recovery in share prices will not be in a straight line but investors minded to sell in early May would have missed a 5% rise in UK share prices and almost 12% for the US. In fact quarter 2 was the best for US market performance for over 20 years. An improving economic picture, low interest rates, unprecedented low bond yields and a resumption of dividends should all conspire to push prices higher between now and the end of 2021.
Whilst selling in May might be a well-worn maxim for 1980s stock traders, it should, like their Filofaxes, be consigned to the history books.
The Chancellor’s summer give-away
Continuing a theme we have seen for much of 2020 so far, Chancellor Rishi Sunak, announced a further £30bn package of stimulus with the aim of breathing life back into some of the sectors hardest hit by the COVID19 shutdown. He said the 25% contraction in economic activity over the past few months was equivalent to the growth generated during the previous eighteen years. A sobering thought if ever there was one.
Some of these initiatives, such as the concession on stamp duty were widely expected, whereas the previously untried (at least in the UK) voucher scheme to encourage families to eat out, came more out of left-field. Overall, the rhetoric maintained a commitment to do everything he could to save jobs and rewarding employers that do precisely that. A summary of the key measures is as follows:
Job retention bonuses for employers
Mr Sunak announced a new programme to reward employers taking back furloughed workers and retaining them continuously until the end of January 2021. Firms will receive £1000 for each eligible employee in a package thought to be worth £9bn, if every furloughed worker was brought back.
There was a strong commitment to this area since many of those sectors which have been hardest hit, have a younger workforce profile. He made an announcement of a £2bn package to pay the wages for six months for more than 200,000 young workers and a pledge of 30,000 new trainee schemes allowing firms to claim £1000 for each new work experience place offered and £2000 for each apprentice, reducing to £1500 for over 25s.
A temporary but extremely welcome reduction in VAT for the hospitality and tourism industries. From next Wednesday for a period of 6 months, VAT will be reduced from the current 20% to 5%. The Chancellor said this would provide a £4bn boost and preserve 2.4m jobs.
This is nothing new. Alistair Darling made an emergency cut in VAT following the global financial crisis, from 17.5% to 15%, in an attempt to revive retail sales. This cut is more targeted and incisive but it is unclear if this concession will be passed onto consumers. The question also remains whether a reluctance to spend (especially going out) might be driven by health concerns or a desire to rebuild household savings.
Stamp duty holiday
From now until 31 March stamp duty will only be charged on properties costing £500,000 or more. Previously it was charged on properties costing £125,000 or more (except for first-time buyers where the threshold was £300,000) and then a reduced rate up to £500,000.
The housing market has seen a massive slump in activity as a consequence of the shutdown, with sales running at less than half those seen last year. On line estate agent Zoopla suggests that 16% of sales in England were exempt from stamp duty last year but estimate this could have been as high as 89% if anything up to £500,000 had been exempt.
A previous stamp duty holiday in 2012 was scrapped by the then Chancellor George Osborne, as it had not yielded the desired outcomes.
‘Eat out to help out’
Whilst putting money or vouchers directly in the hands of consumers is alien to us in the UK, it has been used elsewhere and if successful, is generally seen as a more immediate stimulus to demand than say, lower interest rates or tax breaks. Under this initiative, families eating out in August (Mon-Wed) at participating restaurants can get 50% off a meal with a maximum discount of up to £10 per person.
In a scheme, expected to start in September, the government will pay at least two-thirds of the cost of home improvements that save energy. This will be paid as a voucher when the work is approved. Low-income households could receive a bigger contribution but the overall initiative is thought to be worth £2bn.
This budget statement had the feel of a stop-gap about it, albeit one where money seems to be no object, but many of the measures announced will bring welcome respite to key areas of the economy. A full budget and spending review will follow in the autumn. The question remains whether this will be sufficient to meet the Chancellor’s stated aim, which is to mitigate the risk of high and rapidly growing unemployment. Time will tell but immediate critics say more should have been done to provide guarantees around jobs in areas of the economy hardest hit.
Market reaction was unsurprisingly muted. Whilst the stimulus is headline grabbing, the numbers are modest in the overall context of high government spending we are seeing anyway. Bonds barely moved, stocks eased back by a few points and whilst Sterling initially fell, it had recovered most of the lost ground within an hour.
Dr Andrew Mann