Another month of lockdown has passed. We have now been holed out from society for 67 days. The short-term picture remains bleak with thousands of new coronavirus cases announced each day globally, and a significant proportion of the worlds population remaining at home.
‘The Great Lockdown of 2020’ has led to significant areas of the world’s economy either shutting down or operating at much lower levels than normal. As a result, unemployment levels have sky rocketed upwards. Looking at the US, 40m people are now unemployed. In the Uk, that figure is over 2m. The surge in Uk unemployment figures would have been even sharper without the government furlough programme.
But looking at the stock market, you wouldn’t tell it. The corona virus rally continues and is pushing markets to new dizzying heights. The stock market is currently divorced from economic reality. It appears that the worse things get, the higher the stock market goes.
It is worth pointing out though that the stock market is not the economy. There are other factors at play that determine movements in the markets. For one, economic data is backward looking whereas the stock market forward is forward looking. The markets have seen China continued to return to a semblance of normality and it also anticipates the rest of the western world getting there in the near future. The market for is looking past the lockdowns and anticipating all the pent up demand that has been created which will be a boom for businesses and the economy at large.
Other factors that could explain the rapid rise in markets is the unprecedented levels of fiscal and monetary policy introduced by governments and central banks around the world, low interest rates that have made stock markets the only game in town, and in the US the make-up of the market which have seen the giant tech firms being major beneficiaries of the current climate.
The way the markets have reacted by shooting straight up is contrary to what most people would have predicted, myself included. If you want my take, I still remain very cautious. I feel that there has been irrational exuberance in the markets as of late. I just can’t see the current rally sustaining with the bleak economic picture ahead. But then again I am cautious by nature. Or maybe I am just disappointed that I didn’t buy as much as I should have during the market meltdown in mid March.
This is why I have a monthly stock market purchase programme where I buy stocks ever month regardless of what the market is doing. If I didn’t have this programme, I would be still waiting for stocks to fall further. I would be kicking myself for not having bought stocks at their lows. This programme ensures that I stay disciplined while I invest. It helps with my natural tendency to try and time the markets.
Looking to the stock purchases I made during May, I stuck to defensive companies which have strong predictable cashflows.
- Associated British Food – Bought Bought 10 shares at £17.20 each
- AG Barr – Bough 33 shares at £4.82 each
- Euromoney Institutional Investor – Bought 20 shares at £7.30 each
- PZ Cussons – Bought 89 shares at £1.73 each
These four purchases added £24 to my annual dividend income.
Looking ahead, companies will have to prove their adaptability over the coming weeks and months. The environment they operate in will see major levels of change from shifting consumer habits, trends and mindsets as life begins to get back to a ‘new normal’ post lockdown.
In this regard, I will be paying particular attention to Associated British Foods and its flagship brand Primark which still has no online store! Companies that have effectively digitalised their businesses have been seen as the winners so far as they were able to adapt quickly and flexibly to the lockdowns. It will be interesting to see if Primark has a change of strategy as a result of this pandemic or if it will be more of the same.
If the current economic crises has taught us anything, it is that software is eating the world. As Satya Nadella of Microsoft put it “ we have seen two years’ worth of digital transformation in two months….in a world of remote everything. There is both immediate surge demand and systemic structural changes across all of our solution areas that will define the way we live and work going forward.”
Going forward, all companies will have to become technology companies. Businesses will have to accelerate the resilience, flexibility and capacity of their technology infrastructure. If the new normal is here to stay, those that play by the rules of the old world will soon disappear.