Beware the sucker rally: 2020 is still going to be a horrorshow for equities

By Richard Mason


Even as coronavirus continues to wreak havoc on financial markets, share prices have been rising in recent days. This odd situation has left investors all at sea. Should they buy their favourite companies at these historic lows? Follow one former Goldman Sachs fund manager and pivot hard into physical gold, silver and bitcoin? Go 100% cash? Or just do nothing at all?

There are a lot of questions to which we currently have no satisfactory answer. Has the market factored in enough decline? Too little? About 30% has come off the major indexes but we really do not know how much GDP has been destroyed by these unprecedented lockdowns. 

We are still in this kind of limbo — some might more accurately call it purgatory — where we know consumers are going to be hurting, because jobs are being lost and therefore vast swathes of populations are not going to be spending. 

Jobs watch

One of the main indicators we can look at is unemployment. 

That ex-Goldman Sachs fund manager I mentioned is Raoul Pal. He is widely followed and for good reason. He believes the pandemic will cause “the largest insolvency event in all history”, adding:

“I think the balance of probabilities are that this is a much longer event — in terms of economic impacts — than anybody is pricing in. I think it is a huge societal change that is coming from all of this.

While UK unemployment rates were at a 45-year low in late 2019, according to figures published in January, those numbers have seen a dramatic turnaround. One early warning sign is that in the last two weeks of lockdown, 950,000 people have applied for Universal Credit, the UK’s welfare benefit.

Across the pond in the US, officials at the Federal Reserve believe that unemployment rates could rise to 32% over the next three months with 47 million people put out of work. That would mean figures worse than during the worldwide Great Depression of the 1930s. 

The canary in the coalmine is that investors shrugged off some truly epic weekly job loss numbers.

Friday 3 April saw US indices slide lower when March’s jobs report came out, showing the end of a 113-month jobs growth streak with 701,000 people out of work. However, those figures only included job losses up to mid-March, before many US states started their shelter-in-place lockdowns. In other words, these figures are rosy in comparison to what is coming- initial joblessness claims in the last two weeks of March rose by 10 million

Fewer people working means the effects of lockdown are drastically amplified, with less household spending and less money coming into stock markets. It is inevitable that families will start to follow companies with cash preservation to keep their heads above water being their main focus for the next six months.

Too optimistic

After such epic value destruction since the halcyon days of February 2020, it is clear that investors are now desperately clinging to any vaguely positive news. So, on the morning of 6 April, European and UK stock markets bounced a few percent higher, based on the hope that lower coronavirus death rates in Italy and Spain marked a potential turning point for combatting the virus. It hardly needs stating that a country seeing only 500 or 600 deaths in one day from an ongoing global pandemic is only good news in relative terms. As of midday, the FTSE 100 was up 2.2% while Germany’s DAX benchmark had gained 4.5%. 

These are extremely taxing times emotionally. Foresight to what is coming next is like trying to peer to the bottom of a murky well. Price to earnings ratios are essentially valueless because of this lack of visibility. And so, seeing our favourite companies with P/E ratios in the single digits means nothing as to their actual value. 

Most of us have been blindsided by the rapid pace of change and the volatility rocking these markets. 

As investors, the issue now is not about business prospects over the long term. The short term is all important because so many businesses simply do not have enough cash to tide themselves over for a period of what could be six months without any cash flow at all. 

We have not even yet seen the kind of wide-scale business collapse this economic lockdown predicts. 

In the UK, a handful of already-weak businesses have now gone under. Rent-to-own white goods chain Brighthouse and restaurant group Carluccio’s went bust last week, putting 4,500 jobs at risk. Today, department store giant Debenhams filed notice of it intention to bring in the administrators. As many as 22,000 jobs will be affected.

New car sales in the UK fell 44.4% in March, according to figures out today by the Society of Motor Manufacturers and Traders. 

How investors can be positive at a time like this is beyond me. That equity markets are stabilising at the moment makes little sense. Looking to the horizon there are only bad signs coming. Investors with unduly optimistic blinkers on now trying to cross the tracks and nibble at tempting prices are liable to get hit by a train in the face. 

I will say this: beware the sucker rally. Keep cash on hand and do not believe the bounce. 


This article does not provide any financial advice and is not a recommendation to deal in any securities or product. Investments may fall in value and an investor may lose some or all of their investment. Past performance is not an indicator of future performance.

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