Today marks the first day of the second half of 2020, and as I’m sure you will all agree, a lot has changed in six months.
If you can all cast your minds back to 1 January 2020, how many thought you would be where we are now? Stories of Coronavirus being detected in China were only just emerging at the end of last year. Now everyone in the world knows about this disease. How many of us thought we would have spent so much time this year obsessing over conference call platforms, face masks and hand sanitizer? Be honest, very few.
Just as no one foresaw the future imposition of a lockdown six, nay even five months ago, few would have given any credibility to the suggestion back then that by July, 20 million people would be unemployed in the US alone.
You would have been crazier still to suggest that this grim milestone would have been achieved with the stock market barely changed from the start of the year. However that is where we find ourselves today, with an unemployment rate of nearly 13%, yet the S&P 500 index down just 3.4% since the start of the year and the Nasdaq composite up nearly 13%!
Now I don’t want start a debate on market economics as this is something I am woefully under-qualified to discuss, but clearly something seems to be amiss. That so many people can be out of work and yet the stock market continues to rise suggests a decoupling between financial markets and the state of the economy for the average person on the street.
What is becoming apparent is that markets are extremely jittery. After a few weeks of sustained upwards movement through May and early June, volatility has returned. Monday saw a 500 point gain in the Dow Jones index, its biggest one day rise for six weeks. In the preceding two weeks that same index had lost 10%.
Market ups and downs are not unusual; however it does appear that recent confidence in the strength of the economy was based more on gut feeling rather than fundamentals.
While many had predicted a V-shaped economic recovery, those hopes appear to be fading. Already large parts of the US are facing pressure to return to lockdown like conditions; in Germany, China and the UK such measures have already been implemented. This is even before the long feared second wave has been detected. Sporadic periods of closures and reopening may become the status quo until a vaccine is found.
On the energy markets meanwhile we have seen some relative stability price wise. WTI crude appears to have found a new roof at $40/b. Based on the past month of trading, and market expectations canvassed by the federal reserve, this maybe the new best case scenario that US producers can expect.
Given the depths of price falls earlier this year (remember -$40/b anyone?) most will welcome this stability. However we should remember that WTI crude remains down 36% since its high point this year.
Demand across the world remains subdued and will likely continue to be so through the foreseeable future. While we may see some improvement in gasoline consumption as road trips become the holiday of choice, the pace at which the global economy is hitting its new normal is slower than many had hoped, as highlighted last week by the IMF.
New shutdowns in Texas are particularly difficult to swallow given the devastating impact the pandemic has had on one of the state’s major employment sectors. BP is just one of many oil companies to have announced job losses; in the US alone over 100,000 jobs have already been cut across the oil patch according to the estimates of the Petroleum Equipment and Services Association.
These losses stem from the hardships companies are now facing across the energy sector and beyond, however it would be remiss to think that the worst is comfortably behind us.
In any normal year, the prospect of a tight and increasingly bad tempered US election, a worsening relationship between the worlds two super powers, not to mention the uncertainty that remains on a UK-EU trade deal, would be the stuff of nightmares for the business community.
These geopolitical considerations have not gone anywhere, they are tensions bubbling under the surface waiting to push the pandemic off the front pages. We also have Q2 earnings season to come, which will see the corporate sector report the worst financial results for at least a decade, in many cases much longer.
As we enter July then, and many of us contemplate taking advantage of those little pleasures denied over the past three months or more, be braced for more negative news. Market confidence is already brittle; when the stock market goes up, gains have been mostly incremental; when it falls, it does so in a much more dramatic way. Volatility is here to stay.