Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.
As a child I remember dreading my father coming home to see the perfect cricket ball-shaped hole in his beloved greenhouse. Surprisingly, for me, he wasn’t that annoyed - he had been expecting carnage from what I had described on the phone. What he got was quite an easy replacement job.
I had unknowingly framed a small problem as a big one, so any scolding I thought was on the cards instantly dissipated as we both breathed a sigh of relief.
It was my first real experience in the art of framing and the emotion this behavioural bias can elicit. I made sure not to forget it.
I was reminded of this scene specifically this week, while reading of a few companies doing ‘better than expected’. That’s a phrase investors like to see among the quarterly results. It’s a welcome boost when things are already going well so seeing it pop up recently will feel even better for some who were preparing for the worst.
But, in many cases it’s the ball and the greenhouse all over again. Earnings in the first quarter of the year have lulled many investors into complacency. The mistakes here are in factoring our emotional expectations into results when they have no place there at all, and failing to remember that the true impact of the virus really hit businesses towards the tail-end of the quarter. The danger is that we now give our own sigh of relief and don’t factor in just how badly firms and industries have been hit overall - Q2 earnings are likely to prove an important leveller here.
It’s natural for us to cling to signs of hope now but realistically, as many nations start to emerge from lockdown the real challenge is only beginning. The most difficult phase for the economy and corporate sustainability comes next, as the recovery begins. Markets have been quick to price in a much faster return to normal than may be expected from economists and health professionals - the Nasdaq is now up on the year - but we have to be prepared for this to take longer than we’d like.
Opening the economy early does bring the possibility of a second wave spread and if we do manage to avoid it, uncertainty among consumers and businesses with international supply chains will take time to fully repair.
It will take even longer for the positive aspects of a return to spending to come through on balance sheets and even then there is likely to be huge disparity in the sectors able to regain normality. Fractures within sectors are likely too - the likes of the airline sector faces wholesale challenges as well as individual hurdles for each firm.
What we all want to know is, are we over the worst? A reasonable question and yet one still impossible to answer definitively. Caution in the face of blind optimism not only chimes with current questions over stretched valuations, but it also allows for a frank reading of results as they come out. ‘Better than expected’ holds little weight when we realise we’ve never experienced anything like this before, so our expectations might not be reliable in the first place.
As investors, we need to pay attention to valuations and be ready for further volatility. It can be tempting to think we’re out of the woods now, but on the broader journey back to relative calm the market make up could look very different. The journey will be bumpy and how long it takes to get there is still to be seen. It might take longer than we think.
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.