COVID-19 has had a dramatic effect on all our lives and a significant human cost. This negative bias certainly applied to investment markets where world and New Zealand sharemarkets fell by about 34 % in value between 20 February and 23 March.
This huge market drawback was a “sudden stop” event with almost no economic indicators signalling its coming. This meant that companies, pension funds, individual investors had no lag time to prepare. As such the “safe” income assets of Government stock and A grade corporate bonds were frantically sold to raise cash, and with buyers scarce, supply and demand economics applied and prices also dropped. Interestingly the other great defensive asset Gold suffered the same fate.
With bleak economic forecasts of global recession, high unemployment and multiple business failures it is perhaps surprising that since the low point of 23 March, share values have bounced back strongly to be only slightly off the pre-Covid market highs (and indeed the Nasdaq has just reached a new all-time high). Considering that many economic forecasters liken the Covid economic crisis to the Great Depression of 1929 ( and which took a decade to recover) this is surprising and begs the questions have the markets risen too soon too quickly and is another sudden stop correction therefore likely?
For investors faced with the alternative of putting their savings into safer (but not totally) Income based assets or perhaps bank term deposits at historical low interest rates, this is a confusing time.
A clear reality is that it is impossible to time markets and indeed this has been illustrated by the post-Covid bounce back where for example 17% of the S&P Index (the top 500 companies on the US stock exchange)upside was recovered in the first 3 days after the low of 23 March. If you had withdrawn investment positions to the sidelines and waited to get a sense of how sharemarkets were faring before reinvesting, undoubtedly you would have faced the double whammy of being caught with diminished values after the quick downward cycle and missing 50% or more of the ensuing upside. In other words timing the market would only have had the effect of cementing losses. As the revered investor Peter Lynch once said, “far more money has been lost by investors trying to anticipate corrections, than lost in the corrections themselves”.
Nevertheless after such a strong bounce back pretty well taking us back to the strong pre Covid valuations, and with the spectre of global economic mayhem deepening in the months ahead, is this the time to introduce monies from the seeming safe haven of cash (term deposit) to portfolio investment?
Cash is not king
While the absolute level of inflation may be modest, say 2-3% 1 in an environment of low interest rates, the after-tax returns from cash and term deposits will have a significant wealth impact for long term and retired investors, especially those that have not provisioned for retirement with an investment portfolio or other real assets such as an investment property.
“When you put your money in cash or short-term deposit, look at the interest rate you are getting in relationship to the inflation rate,” says Ray Dalio, founder of Bridgewater Associates, the world’s largest hedge fund. “You will see that your after-tax return will be below the inflation rate. That means that you are experiencing a tax on that cash equal to that difference. So, you can’t keep your money in cash. If you think that is safe, you’re looking at it wrong-it is a sure losing strategy.”
Markets tend to move ahead of economic events and those choosing “cash” as their Covid haven are likely suffering both reduction in buying power and opportunity cost.
COVID-19 global stimulus
The New Zealand Government has announced the largest stimulus package in New Zealand’s history. In the United States, the Senate approved a “bazooka” -the largest economic stimulus package in modern history. The US$2.2 trillion (NZ$3.7 trillion) package will give American families and businesses a financial shield against the ravages of COVID-19.
To put US$2.2 trillion into context, at 10% of United States GDP, it is more than twice what the 2008 Global Financial Crisis rescue package was worth. The 1948 Marshall Plan, where the United States bailed out Europe, was (inflation adjusted) US$144 billion. This United States’stimulus package dwarfs even a world war level of investment.
The stimulus packages announced throughout New Zealand, the US and the world are good for both citizens affected by Covid and for financial markets. Furthermore, the “bazooka” global stimulus to date may end up being just a “down payment” with more fiscal measures to come.
When we think about where financial markets will be in one year, three years or five years’ time, it is hard to bet against the support governments are providing. At the same time, shares can be bought significantly cheaper than they were even a relatively few weeks ago. This is the key driver in building wealth.
The market bounceback
Currently, the S&P 500 is up 32.8% from its lowest close, and the technology-heavy Nasdaq is up 36.7% from its lowest close and is positive for 2020! Tech giants have been provided with a COVID-19 tailwind and are driving equity markets higher. Society is relying on technology for virtually everything amid this pandemic, but is that enough to keep the entire stock market afloat?
A chart compiled by NZ Funds Management Ltd depicting the size of the US fiscal stimulus compared to the Global Financial Crisis. Note how quickly Covid stimulus has been introduced.