Mark Fowler: Rights, wrongs and market returns

The markets sell-off since mid-March was extraordinary, writes Mark Fowler. Photo / Alex Robertson

COMMENT:

What we have seen in the securities markets over the past few weeks and months can only be described as extreme – in an investment's context of course.

The markets sell-off since mid-March was extraordinary and for many investors like nothing they had ever seen before. Thousands of points a day - indeed day after day – on the Dow and hundreds of points a day here on the NZX50.

The widely representative S&P500 fell 34 per cent in just a few weeks as the markets priced-in expectations of a significant downturn in economic activity and company earnings, and therefore reductions in dividends as a result of Government-initiated social restrictions and various forms of lockdown. New claims for unemployment relief in the US totalled 40 million in just five weeks! The NZX50 dropped a whopping 30 per cent over the same period for the same reasons. Then the fiscal response arrived.

Governments began borrowing big and effectively shelling out money (lots of it) to companies, workers, and other individuals – and I am talking trillions and trillions all around the world. The NZ Government announced its, borrow, spend, and hope Budget in May including establishing a $50 billion "Covid" fund.

Central banks all around the world including our RBNZ began printing money and buying government bonds, and markets rallied hard. The S&P500 in the US climbed 43 per cent and the NZX50 bounced 32 per cent off their respective lows. So now, at least at the time of writing this article, we find ourselves with the S&P500 and the NZX50 down just 6.7 per cent and 7.5 per cent respectively from their highs reached in early March before all this began! This is hard to fathom as the economic affect and fallout of all the above-mentioned restrictions can only be negative. It seems that the markets have effectively "swapped" the restriction downturn with the fiscal and monetary stimulate, support or even upturn. We will see…

So where to from here and what to do? It is sure that markets will remain volatile for some time, at least throughout the rest of the calendar year. Restrictions and vaccine–related news is driving investor sentiment and markets. We will likely see big movements up and down as equity markets react to this news.

Overall I can't help but think that equity markets must come back from current levels over the next 12 months – surely the economic news must be more than sufficiently negative over the coming year to outweigh any fiscal and monetary stimulus that is provided? That is not to say there won't be opportunities to make good investment gains – there always are in any environment – so investors should stay in close touch with their advisers to take these opportunities as they arise.

In summary, investment markets look set to remain volatile. More of the same over the coming months but probably not of the same magnitude we have all just witnessed. Stay diversified, stay in touch with your financial adviser and stay the course.

Mark Fowler is Head of Investments at Hobson Wealth Partners.