Economists are pointing towards a K-shaped recovery as opposed to the initial hoped for V-shaped recovery (a sharp bounce back) or a feared W-shaped recovery (a short recovery followed by another downturn). In this scenario there is an uneven economic recovery increasing the divide between the haves and the have-nots, with the winners being the portions of the economy that do well in a post Covid economy.
If one looks at the recent performance of US financial markets, much of the performance has been driven by a handful of technology companies like Apple, Alphabet (owner of Google) and Amazon. Apple recently became only the second company in history to hit a market capitalization of more than $2 trillion. If one were to add Microsoft and Facebook (the high-tech “big five”) then nearly a quarter of the performance of the S&P500’s rebound is explained since the March crash (see the chart of the week).
The U.S. Federal Reserve unveiled a new long-run strategy which will aim to target an average 2% inflation rate over time as opposed to the previous target of 2%. While the change appears subtle it will allow the Fed to let inflation run higher than 2% before interest rates will need to be hiked, meaning rates should stay lower for longer. In the short term, this should provide a further underpin to financial markets including non-U.S. assets on the back of a weaker dollar.
Despite new surges of coronavirus infections across many European countries, governments are trying to avoid the need for nationwide lockdowns rather opting to enforce lockdown measures in areas where cases are surging. France, Spain and Germany have recorded some their highest daily rises since the spring in recent days.
Japanese prime minister Shinzo Abe announced that he is resigning because of declining health caused by ulcerative colitis, a bowel disease. The prime minister who has been at the helm of the country since his election in December 2012 instituted a series of economic reforms during his time in office that were collectively known as Abenomics and were aimed at reinvigorating the Japanese economy. He will remain in his post until a successor is chosen.
Positive reports on treatments and progress on vaccines helped U.S. equity markets end the week higher with the S&P 500 now up over 50% since the market bottom in March of this year. The Dow Jones Industrial Average (+2.59%) and the Nasdaq (+3.39%) also ended the week strongly in the green. The pan-European STOXX 50 Index ended the week 1.73% higher, while the UK’s FTSE 100 (-0.81%) was down on the week. Japanese stocks were largely flat ending the week slightly off while the Shanghai Composite Index (+0.67%) rebounded on positive local economic data.
Market Moves of the Week
The stakes for this weekend’s ANC national executive committee (NEC) meeting got higher with the leaking of former president Jacob Zuma’s letter accusing his successor of betraying the party’s founders. President Ramaphosa is said to be standing firm on his demand that leaders facing corruption charges be forced to take a leave from office.
Earlier this week, the President said in the letter to party members that the ANC needs to accept that its leaders stand accused of corruption — and that the party itself is “accused number one”.
The rand surged against the dollar on Friday as global investors hunted for higher-yielding assets in emerging markets. The rand firmed over 3% over the week to close at R16.59/$.
The JSE All-Share Index ended the week relatively flat (+0.19%), with the banking and precious metals sectors largely weaker over the week.
Chart of the Week
The chart traces the growth in earnings and sales per share for the NYSE Fang+ index (Facebook, Apple, Amazon, Netflix, Google, Alibaba, Baidu, Nvidia, Tesla & Twitter), and for the MSCI ACWI (All Country World Index), which covers both developed and emerging markets, since the beginning of 2018. The Fangs’ earnings have increased by about 140% in that time, while the ACWI’s earnings are down 20% over the same period illustrating the divide in performance.
Whilst volatility is likely to continue amid current market uncertainty over the coronavirus disease, our message to all investors remains the same – stay calm in making decisions that are aligned with your long-term goals, not current market conditions. In any market environment, we strongly believe that investors should stay properly diversified across a variety of asset classes and that clients financial plan supports their long-term goals, time horizon and tolerance for risk.
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