Have financial markets bottomed out?

Hope you all have a wonderful Easter. Much like how Easter is all about ‘rebirth’ we have also seen a ‘rebirth’ within financial markets last week.

Global financial markets came roaring back last week in all asset classes but particularly with stock markets. We saw major markets like the U.S.’ S&P 500 Index and Europe’s EuroStoxx 50 Index +12.10% and +8.63% respectively. Hong Kong and China markets lagged relatively speaking with the Hang Seng Index and CSI 300 Index +4.58% and + 1.51% last week.

AQUMON’s diversified ETF portfolios are -0.02% (defensive) to +8.75% (aggressive) last week and +0.20% (defensive) to -13.45% year to date (aggressive). The biggest return drivers last week beyond U.S. stocks were Indian stocks along with high yield bonds both seeing over +10% returns last week. Last week’s biggest lagger was oil (WTI crude -19.69%) but energy stocks in comparison were up +13.68%.

The big question investors are asking is “have financial markets bottomed out?” which we hope there we can provide a little insight into.

What drove the market rally last week? Any risks I should be aware of?

There were 2 major reasons that drove last week’s market rally:

1) Headlines improving:

Investors are increasingly confident that the coronavirus situation is starting to get under control by the “plateauing” of infections in several European and U.S. hot spots such as New York. We’ll go into this more below. Also Senator Bernie Sanders dropped out of the U.S. presidential race last week which also calmed markets since he was viewed as a market disruptor.

2) Massive central bank support:  

The U.S.’ Federal Reserve announced an additional US$2.3 trillion stimulus plan to help boost the economy disrupted by the coronavirus pandemic. The central bank also said it would further proactively buy investment-grade and high yield bonds to address investor concerns about solvency and liquidity issues with credit markets.

As a result the S&P 500 spiked 12% this past week, its best such return since 1974.But lost in this optimistic frenzy were two other market events that investors may have somewhat overlooked:

1) U.S. initial jobless claims continue to climb at an unprecedented level recording another 6.6 million claims last week. Looking ahead to this Thursday we are on track to surpass 20 million claims in 4 short weeks. This represents close to 12% of the U.S. working population. 

2) OPEC and its partners managed to agree on a historic oil production cut of 9.7 million barrels per day (bpd) but not all nations willingly went along. Mexico balked at the demand by the OPEC+ group of oil producing nations to cut output by 400,000 bpd and instead offered a cut of 100,000 bpd. U.S. President Donald Trump said he “generously” agreed last week to help Mexico make up the rest. Even though this was a ‘historic’ cut in oil production investors were expecting more which is showcased by the downward pressure on oil prices post announcement. WTI oil is currently trading around US$20 which beyond recently are levels not seen since 2002.

With the aggressive central bank stimulus (likely more coming) and improved investor confidence it is entirely possible the market has created a short term bottom but market unknowns remain. 

Coronavirus situation getting ‘better’ but don’t get carried away

Global infections are about to eclipsed 2 million cases (currently 1,992,189 as of Tuesday) and we doubled from 1 million cases in just 13 short days. To be fair, this is not all because the coronavirus situation is worsening (in some countries it may be) but more so because globally, countries are now also more proactive in testing thereby driving up numbers of those who tested positive. 

As we see infection numbers somewhat stabilize (some might even suggest downtrending) in Western European countries such as Italy and Spain, the focus is now more on the U.S. and how they handle this pandemic. Currently the U.S. has one quarter of the world’s infection cases at 611,156 with New York state taking up 33% at 202,208 cases as of Tuesday. New York Governor Andrew Cuomo on a hopeful note Monday declared "the worst is over," as he announced the state’s had less than 700 daily deaths for the first time in a week. He did quickly caveat that by saying "if we continue to be smart." (by heeding to social distancing guidelines).  

As we alluded to last week, the U.S. is in a tricky situation because they are taking different approaches on a state level yet Americans can still freely travel between most states (and potentially infect others). This is quite different from the aggressive nationwide lockdown approach by Italy or China. What does this mean? In this early stage two things we can potentially see:

1) U.S. infections are ‘peaking’ at different speeds with coastal states like New York leading the way first. This as per analysts logically may result in a multiphase peaking situation which is quite different from countries that took a decisive nationwide approach. In a more simplistic example imagine we are looking at the coronavirus situation for the entire European Union. That too would suggest that underlying countries’ infections peak at different times and the difficulty in getting a coordinated response. 

2) If this is indeed the case this may extend the duration before the U.S. can properly reopen their economy and businesses. Early estimates by analysts suggest sometime middle to end of May (maybe later) in terms of reopening and a subset of Americans start to initially return to work in the middle of this upcoming summer.

Make no mistake, the human-level answer to this coronavirus pandemic is ultimately a medical solution for all of us. According to the World Health Organisation (WHO), there currently are more than 60 separate teams in about a dozen countries in a race to develop a coronavirus vaccine. We are seeing first glimmers of hope with positive testing results but even aggressive estimates place the vaccine manufacturing at mass scale sometime in the fall. The issue after that then comes down to distribution. How exactly will the manufacturers or their corresponding nations distribute the vaccine to the rest of us globally? This is the trillion dollar question.

One thing investors should be optimistic about is financial markets will rebound much quicker (as it has time and time again shown) than before a medical solution is implemented. Although a virus pandemic is unchartered territory for all of us since World War II stock markets have rebounded on average 4.4 months ahead of the actual end of the recession. 

After this rally did I just miss a major buying opportunity? 

You did not.

Let me explain. The fast and furious market selloff and rebound during the past 7-8 weeks have mainly been institutional investor driven. The smaller retail investors like most of us have generally not sold or bought much during this entire situation.

The past few days we’ve been reading a lot more articles and research that claims we as investors have “missed the boat” with this buying opportunity and the bear market is over. Although it is possible that it seems a bit early to jump to these conclusions.  

For example Goldman Sachs on Monday declared that the worst of the bear market is over “if the U.S. does not experience a second surge in infections after the economy reopens, the ‘do whatever it takes’ stance of policy makers means the equity market is unlikely to make new lows,”. Their S&P 500 year-end target remains at 3,000 (+8% from Monday’s closing price). That’s hanging on a pretty big ‘if’ statement.

We here in Hong Kong live in a unique situation where we are ahead of the coronavirus curve (almost like we’re ‘living in the future’ relative to our Western counterparts). Given in Hong Kong we are currently dealing with subsequent infection waves most of us will agree it is not easy to shake off this virus in one go. Couple this with potential negative macro headlines in at least most of April (potentially into May) and this results in pressure for the market to potentially sell off again and remain volatile in the near term. 

There will be additional buying opportunities immediately ahead. As investors we just need to approach it with more caution right now. 

Why does everyone ask me to “stay invested”? 

For many of us who’ve worked in the financial industry we know the ‘textbook’ suggestion is to ask investors to “stay invested” at all times. For those of us who truly believe in long term investing there absolutely is value (and many charts and figures) to back up this suggestion. Investors who invest long term in general do outperform market timers. This is a fact.

BUT often as investors we need to ask ourselves is this suggestion made to benefit me or more to benefit the bank, the investment house or the financial advisor? This you need to be crystal clear.

In such challenging times we feel the #1 thing you should be concerned about is you and your family’s well being (physical, mental or financial). As we’ve mentioned on multiple occasions, your investments are important but investing in the market should not stress you out financially. This is why we suggest you simply manage your investment risk by either how much you invest or by what you invest into (ideally in more liquid assets so they can easily convert into cash if needed). Naturally if you have higher risk tolerance after this short term bottom you can carefully buy and accumulate in smaller tranches especially if the market pulls back.

If you have any questions please don’t hesitate to reach out to us at AQUMON. We’re always happy to help. Thank you again for your continued support for AQUMON, stay safe outside and happy investing!

Ken

About us

As a leading startup in the FinTech space, AQUMON aims to make sophisticated investment advice cost-effective, transparent and accessible to both institutional and retail markets, via the adoptions of scalable technology platforms and automated investment algorithms.

AQUMON’s parent company Magnum Research Limited is licensed with Type 1, 4 and 9 under the Securities and Futures Commission of Hong Kong. In 2017, AQUMON became the first independent Robo Advisor to be accredited by the SFC.

AQUMON’s investors include Alibaba Entrepreneurs Fund, Bank of China International and HKUST.

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