How did markets recover with COVID-19 still raging?

Q2 Market Update




Q2 2020 Market Update

"In the long term, if the companies you own do well then your portfolio should as well. We still believe that is a sensible call to make." John Butters - Chief Investment Officer

A brief market overview

Global stock markets have had a good three months since the end of March, rising by 20% and edging slightly above their level of 1st January. Bonds continued to be of help, with UK government bonds adding about 3% in the second quarter to stand at 10% up for the year to date.

Was this to be expected?

The response of a number of market commentators has been one of incredulity. How can markets be up with coronavirus still raging? I remember reading similar comments in 2009, as the financial crisis began to end and equities rocketed upwards. It is quite normal for pundits to be behind the market.

The "complex system"

But surely, the critic may reply, companies must be worth less now than they were at the start of the year! That may or may not be true, but in the short term the price of shares is determined by the ever-shifting demand for shares. It is tempting to think that we can predict that demand by imagining a company and the people who might want to buy shares in it: at the moment, we might imagine a struggling shop and an investor much like ourselves. But this imaginative way of thinking is straightforwardly wrong.

There are many thousands of shares listed on stock exchanges and many millions of different market participants. The reality of the market is beyond our imagination. If that is so, then how much further beyond it are the myriad interactions between market participants that actually determine the prices we see? 

A system whose overall behaviour depends on the interaction of many parts is called a “complex system”, and it is a matter of mathematical fact that such systems’ behaviour cannot be predicted by simply extrapolating from the behaviour of their components. It is the huge number of different interactions that really matter. This is why the market is often counter-intuitive: our intuition cannot possibly encompass it.

Do not try to time the market

There are two reasonable responses to this reality. First, humility: we must give up on predicting the unpredictable. Second, perspective. In the long term, if the companies you own do well then your portfolio should as well. We still believe that is a sensible call to make.

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Important information

The information contained in this article does not constitute financial advice or a personal recommendation.  Past performance is not a guide to future performance. The value of an investment and its income can both increase and decrease and you may not get back the full amount originally invested. The value of overseas investments will be influenced by the rate of exchange.

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