Last week saw equity markets fall fast on fears of an apparent second wave of Covid-19 in China and a continuation of the first wave in the US. A few short hours later the Central Bank of America came to the rescue, again, announcing a fresh injection of cash to support markets which came as a pleasant surprise. The result was that an expected 3% fall in the American stock market in the morning was followed in the afternoon by a 1% increase.
Elsewhere, on a day full of good news rumours for markets, the U.K. and EU looked set to reach a deal, with the bloc’s top officials and Boris Johnson confident on a willingness to compromise and the PM saying the prospects for an accord are “very good”. A resurgently chipper Prime Minister even brought back the 1970’s Esso petrol’s strapline “Put a Tiger in your Tank” to emphasize the concerted effort he expected both sides to now put in to finalise a deal.
There was yet more optimism surrounding the Trump administration’s $1 trillion infrastructure package and its potential to spur growth through targeting areas such as roads, bridges and 5G. Between now and the election we can expect many more of these kinds of suggestions and proposals, a situation reminiscent of the on/off China-US trade deals. Back then when markets wobbled, US officials or even the President himself would often make very positive noises about how well the talks with China were going to calm market fears. Even at the time, it seemed amazing the positive but basically same headlines could move markets multiple times. There have been similar attempts to do this in the face of the economic impact around the virus, but that is proving much more difficult to influence.
It has been highlighted many times about the risks of sitting outside of risk assets or running to cash. The market rises ignore the generally weak economic outlook and instead focus on stimulus and the belief that central banks have the investors back. Until that faith is broken the markets probably cannot fall too far.
We now feel more cautious than we have for several months about risk assets as so much stimulus and good news now appear to have been priced into the markets. It makes sense to us to maintain our Treasury and Gilt holdings, a relatively high cash balance and our gold position. After all, there is always the possibility that economic fundamentals we used to read about in books (such as inflation, lower economic growth rates and increasing unemployment rates) make a comeback. Anything is possible.